Tag Archives: #Powell

Not Worried

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‘Bout markets, Scott Bessent’s not worried
As favor with specs can’t be curried
Instead, what he seeks
Is policy tweaks
To help growth, though folks want that hurried
 
Meanwhile, Chairman Jay and his team
Continue their policy theme
Inflation’s still falling
Although they are calling
For patience, as bulls start to scream

 

“I’ve been in the investment business for 35 years, and I can tell you that corrections are healthy, they are normal,” Bessent said Sunday on NBC’s Meet The Press. “I‘m not worried about the markets. Over the long term, if we put good tax policy in place, deregulation and energy security, the markets will do great.”

The above comments from Treasury Secretary Scott Bessent yesterday morning (quote courtesy of Bloomberg.com) have garnered a remarkable amount of commentary amidst both the political and market punditry.  My first comment is I must be much older than Mr Bessent, since I have been in the investment business for 43 years.  However, as I have written numerous times over the course of the past years, the market has not cleared for a very long time.  Since the 1987 stock market crash, when then Fed Chair Greenspan started pumping liquidity into the financial markets to stabilize things, and realized he could do that to prevent serious downturns, we have seen two significant downdrafts, the tech bubble and the housing market crash, both of which were immediately met with massive liquidity injections, extremely low interest rates and for the latter, the advent of QE.

All of that liquidity has resulted in market excesses across many markets and has been a key driver in the stock market’s exceptional rise since the Covid blip.  Adding to that was the massive fiscal spending (remember those 7% budget deficits?) which has helped to insure that not only did markets rise, but so did retail prices.

Now, along comes a Treasury Secretary who hasn’t married himself to higher stock markets on a day-to-day basis and instead is focused on the long-term.  What I find most interesting is that the same pundits who are screaming about Bessent and Trump destroying the economy, were all-in on the discussion of how the US debt was going to ultimately cause a collapse.  Yet as the administration explicitly tries to address that issue (you may disagree with their methods, but that is their clear goal) suddenly, the fact that stock prices are falling is a tragedy of biblical proportions.  Here’s the thing, the worst performer, the NASDAQ, is down about -12% since its peak last month as per the below chart.  I might argue that is hardly a collapse.  In fact, a healthy correction doesn’t seem to be a bad description.

Source: tradingeconomics.com

There is no doubt that uncertainty about the near-term direction of the economy has grown, and there is no doubt that President Trump’s mercurial tendencies make long-term planning difficult.  However, I would contend we are a long way from the apocalypse or even a stockopalypse.  But once again, I highlight that volatility remains the key metric for now, and that hedging exposures remains very important.

With that as backdrop, the FOMC meets on Wednesday and while there is no expectation of any rate move, the market continues to price three rate cuts for the rest of the year, pretty much one each quarter.  A key unknown is just how hawkish or dovish Fed members currently find themselves given the recent market gyrations.  As well, while inflation had seemingly been the primary focus, with all the concern over a significant slowdown in the US economy, there are now many who believe we will see a rising Unemployment Rate despite a lack of evidence from the weekly Claims data.  These same pundits are also certain that Trump’s tariff policy will lead to rising inflation, really putting the Fed in a bind with a stagflationary outcome.  And maybe that is what will happen.

But I would contend it is far too early to assume that is our future.  First off, on the inflationary front, energy prices have fallen, a key inflation component, and as far as the tariffs are concerned, if they reduce demand, that is likely to cap prices. If on the other hand, demand is not reduced, I don’t see slowing growth as the likely outcome.  

In the end, if the economy is adjusting from one with far more government spending support, to one with more organic private sector economic activity, the transition may be bumpy, but the outcome will be far stronger.  We shall see if that is how things evolve.

In the meantime, let’s look at how the world has responded to the latest stories.  Friday’s US equity rebound was welcomed everywhere, although the key narrative remains the end of American exceptionalism, at least as regards equity markets.  Friday also saw the exiting German Bundestag agree to eliminate the debt brake for infrastructure and defense, with Chancellor-to-be Merz agreeing to waste spend €100 billion on climate related projects to convince the Green Party, which is out of the new government, to vote in the rule change before the new government is seated.  It is not clear to me how spending that money on net-zero ideas will defend Germany, but then I am just a poet, not a German policymaker.

As to Asian markets, other than mainland China (-0.25%) green was the predominant color on screens overnight with Japan (+0.9%), Australia (+0.8%) and Hong Kong (+0.8%) all following the US.  One of the remarkable things, though, is that Chinese data overnight showing IP (5.9%), Retail Sales (4.0%) and Fixed Asset Investment (4.1%) was generally solid.  Of course, Unemployment (5.4%) rose 2 ticks, an unwelcome outcome, and House prices (-4.8%) continue to decline, albeit at a slowing rate, but neither of those speak to a rebound in the Chinese economy.  The end of the Chinese NPC offered more platitudes about supporting the consumer, but it is not clear where the money is coming from.  And recall, more than 60% of Chinese household wealth remains tied up in housing investment, which continues to decline in value.  The Chinese have a long way to go in my view.

Quickly, European bourses are all modestly higher this morning, on the order of 0.3% or so, as hope springs eternal that the rearming of Europe will drive profit margins higher.  Unfortunately, at this hour (7:15), US futures are pointing lower, about -0.25% across the board, although that is up from earlier session lows.

In the bond market, Treasury yields have slipped -2bps this morning, but are really just trading around in their new trading range of 4.20% to 4.35% as investors try to get a handle on which of the big themes are going to drive markets going forward.  European sovereigns are all seeing rallies, with yields slipping -5bps to -6ps which seems out of step with the news about the end of the German debt brake.  Perhaps bond investors don’t believe the legislation will pass, or perhaps that they won’t spend the money after all.  As to JGB yields, the edged lower by -1bp in the 10yr, although longer dated paper has seen yields rise with 40-year bonds touching 3.0% for the first time in their relatively short history.

In the commodity markets, oil (+1.4%) is continuing to bounce of its lows from last week but remains well below levels seen at the beginning of the month.  The US attack on the Houthis is being called the beginning of an escalation in the Middle East by some, and perhaps that has traders concerned.  On the flip side, ostensibly, Presidents Trump and Putin are to speak tomorrow in an effort to get peace talks moving along, potentially a bearish oil signal.  In the metals markets, gold (+0.6%) remains in great demand having crested the $3000/oz level last week and rising from there.  This has helped both silver and copper, with the latter, despite concerns over slowing economic activity, pushing closer to $5.00/lb.  There is much talk of shortages in the market driving the price action.

Finally, the dollar is under pressure this morning with every G10 currency firmer led by NZD (+0.6%) and AUD (+0.4%) although gains elsewhere are on the order of +0.25%.  This story seems to go hand-in-hand with the German defense spending and the end of US exceptionalism.  As to the EMG bloc, most of these currencies are also stronger this morning, but the magnitude of these moves is generally less than the G10 bloc.  Recall, Trump wants a lower dollar, and my default is that is where we are headed at this point.

On the data front, we have an action-packed week ahead starting this morning.

TodayRetail Sales0.6%
 -ex autos0.4%
 Empire State Manufacturing-0.75
TuesdayHousing Starts1.375M
 Building Permits1.45M
 IP0.2%
 Capacity Utilization77.8%
WednesdayFOMC Rate Decision4.50% (unchanged)
ThursdayInitial Claims224K
 Continuing Claims1880K
 Philly Fed12.1
 Existing Home Sales3.92M
 Leading Indicators-0.2%

Source: tradingeconomics.com

As we have seen over the past many months, I suspect that this week’s data will be likely to give analysts on both sides of the economy is stronger/weaker argument new fodder.  While the Fed won’t be doing anything, and despite their relative decline in importance, I suspect that Chairman Powell’s press conference will still get a lot of attention.

While we don’t know what the future will bring for sure, I remain convinced that the dollar will slide, and commodities will rally.  As to stocks and bonds, well your guess is as good as mine.

Good luck

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Balling Their Fists

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The world is no longer the same
Since Trump put Zelenskiy to shame
Now Europe insists
They’re balling their fists
And this time it isn’t a game
 
But markets just don’t seem to care
That, anymore, war’s in the air
Instead, what’s decisive
Is that the new price of
All cryptos has answered their prayer

 

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

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

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

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

Source: tradingeconomics.com

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

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

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

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

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

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

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

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

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

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

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

TodayISM Manufacturing50.5
 ISM Prices Paid56.2
WednesdayADP Employment 140K
 ISM Services52.9
 Factory Orders1.6%
 -ex Transport0.3%
 Fed’s Beige Book 
ThursdayECB Rate Decision2.75% (current 3.00%)
 Trade Balance-$93.1B
 Initial Claims340K
 Continuing Claims1870K
 Nonfarm Productivity1.2%
 Unit Labor Costs3.0%
FridayNonfarm Payrolls153K
 Private Payrolls138K
 Manufacturing Payrolls5K
 Unemployment Rate4.0%
 Average Hourly Earnings0.3% (4.1% Y/Y)
 Average Weekly Hours34.2
 Participation Rate62.6%
 Consumer Credit$15.5B

Source: tradingeconomics.com

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

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

Good luck

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Shattered His Dreams

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The data was hot yesterday
And that put the pressure on Jay
It shattered his dreams
‘Bout all of his schemes
To help keep inflation at bay

 

By now, I am sure you are aware that the CPI data was higher than forecast, and certainly higher than would have made Chairman Powell comfortable.  The outcome, showing Headline rising to 3.0% and core rising to 3.3% with correspondingly higher monthly rises was sufficient to alter the narrative at least a little bit.  Chair Powell even mentioned it in his House testimony, noting, “We are close, but not there on inflation…. So, we want to keep policy restrictive for now.”  Essentially, the data makes clear that the Fed is not going to be cutting the Fed funds rate anytime soon.  The futures market got the message as it is now pricing just 29bps of cuts this year, with December the likely date.

It will be no surprise that the stock market’s initial response was to sell off substantially, but as per the chart below, it spent the rest of the day clawing back the losses and wound up little changed on the day.  This morning, it remains basically unchanged as well.

Source: tradingeconomics.com

Treasury bonds, though, had a less fruitful session, falling (yields rising) sharply on the print, but never really regaining their footing with yields jumping almost 15bps at one point although finishing the day about 10bps higher and have given back 2bps more this morning.

Source: tradingeconomics.com

Now, we all know that the Fed doesn’t target CPI, but rather PCE.  However, after this morning’s PPI data release, most economists (although not poets) will be able to reasonably accurately estimate that data point for later this month, as will the Fed.  And that number is not going to be moving closer to their 2.0% target.  What seems very clear at this point is that every Fed speaker for the time being is going to be harping on the caution with which they are going to move forward.

If we look at this from a political perspective, something which is unavoidable these days, it is important to remember that Treasury Secretary Bessent has made clear that he and the president are far more focused on the 10-year yield than on the Fed funds rate.  To that end and given the fact that all this data was from a time preceding President Trump’s inauguration, I don’t think they are too worried.  I would look for the President to continue his drive to reduce waste and fraud in the government and attack that deficit.  Certainly, the news to date is there is a great deal of both waste and fraud to reduce, and if the president is successful, I believe that will play out in significantly lower 10-year yields, if for no other reason than the deficit is reduced or closed.  This story is just beginning to be written.

Now, Putin and Trump had a call
As Trump tries to end Russia’s brawl
They’re slated to meet
So, they can complete
A treaty with Europe awol

Under any interpretation, I believe the news that Presidents Trump and Putin are going to meet in an effort to hammer out an end to the Russia/Ukraine war is good news.  Beyond the simple fact that less war is an unadulterated good, I think it is very clear that this particular war has had significant market impacts, hence our interest here.  Obviously, energy prices have been impacted, as both oil and NatGas prices are higher than they would otherwise be given the removal of some portion of Russia’s exports from the global markets and economy.  As such, the end of this conflict, with one likely consequence being Western Europe reopening themselves to Russian energy imports, is likely to see prices decline.  

This matters for more reasons than the fact it will be cheaper to fill up your tank at the gas (petrol) station, it is very likely to have a very positive impact on inflation writ large.  As you can see from the chart below, there is a very strong correlation between the price of oil and US inflation expectations.  Declining oil prices are very likely to help people perceive a less inflationary future and will reduce the rate of inflation by definition.  

Source: ISABELNET

Inflation is an insidious process, and once entrenched is very hard to reduce, just ask Chairman Powell.  I also know that there has been much scoffing at President Trump’s claims he will reduce inflation, especially with his imposition of tariffs all over the place. (It is important to understand that tariffs are not necessarily inflationary by themselves as well explained by my friend the Inflation guy in this article.). However, between his strong start on reducing government expenditures and the potential for an end to the Russia/Ukraine war leading to lower energy prices, these are longer term effects that may do just that.

Ok, let’s move on to the market activities in the wake of yesterday’s CPI and ahead of this morning’s PPI data.  As discussed above, yesterday’s US markets rebounded from their worst levels of the morning and closed modestly lower with the NASDAQ actually unchanged.  In Asia, Japanese shares (+1.3%) had a solid day as the weak yen helped things along although Chinese shares (HK -0.2%, CSI 300 -0.4%) did not fare as well on the day with tariffs still top of mind.  Elsewhere in the region, other than Korea (+1.4%) movement was mixed and modest.  In Europe, the possibility of peace breaking out in Ukraine has clearly got investors excited as both Germany (+1.5%) and France (+1.2%) are seeing strong inflows. The UK (-0.7%) however, continues to suffer from economic underperformance with no discernible benefits shown from the governments weak efforts to right the ship.  GDP was released this morning and while they avoided recession, it’s very hard to get excited over 0.1% Q/Q growth.  As to the US futures market, at this hour (7:20), they are essentially unchanged.

In the bond market, we’ve already discussed Treasury yields, but another benefit of the prospects for a Ukrainian peace is that sovereign yields have fallen substantially, between -5bps and -8bps, throughout the continent.  Once again, the impact of that phone call between Trump and Putin has been quite significant.  Consider that not only are energy prices likely to slide, but the required government spending to prosecute the war is likely to diminish as well.

In the commodity markets, it should be no surprise that oil (-1.3%) prices are sliding as are NatGas prices in Europe (TTF -7.5%) as the opportunity for cheap Russian gas to flow to Europe is once again in view.  To highlight the impact that this has had on Europe, prior to the Ukraine war and the halting of gas flows, the TTF contract hovered between €5 and €25 per MWh.  Since the war broke out, even after the initial shock, it has been between €25 and €55 per MWh.  This is all you need to know about why Europe, and Germany especially, is deindustrializing.  As to the metals markets, after a few days of consolidation, gold (+0.4%) is on the move again although it has not yet recaptured the highs seen early Tuesday morning.  Give it time.  Copper (+0.6%), too, is back on the move and indicating that economic activity is set to continue to grow.

Finally, the dollar is mixed this morning, although arguably a touch softer overall, as the Russia news has traders looking for less negativity in Europe.  So modest gains in the euro and pound, about 0.15% each is offsetting larger losses in AUD (-0.3%) and NZD (-0.6%), although given the much smaller market size of the latter two, they matter much less.  JPY (+0.4%) is rebounding after yesterday’s sharp decline on the back of the jump in Treasury yields, and it is noteworthy that CHF (+0.65%) is gaining after its CPI data showed a decline in prices last month.  In the EMG bloc, CLP (+0.7%) is stronger on that copper rally, while ZAR (+0.1%) seems to be edging higher as gold continues to perform well. MXN (-0.4%) though is still struggling with the potential negative impact of tariffs and otherwise, there is not much to report.

This morning brings PPI (exp 0.3%. 3.3% Y/Y headline; 0.3%, 3.5% Y/Y core) as well as the weekly Initial (215K) and Continuing (1880K) Claims data.  There are no Fed speakers on the docket, but at this point, I expect the Fed will be fading into the background since they are clearly on hold and President Trump commands the spotlight.  Unless the data starts to veer dramatically away from what we have seen, it appears that the market is going to continue to respond to Trumpian headlines, which of course are impossible to predict.  But remember, most of the rest of the world is still in cutting mode so the dollar should continue to hold its own.

Good luck

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Not in a Rush

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Said Powell, we’re not in a rush
To cut rates as we try to crush
Remaining inflation
And feel the sensation
Of drawing an inside straight flush
 
Up next is the CPI data
Though not one on which we fixate-a
The surveys explain
That people remain
Quite certain that we’re doing great-a

 

Chairman Powell testified to the Senate Banking Committee yesterday and the key comments were as follows, “Inflation has eased significantly over the past two years but remains somewhat elevated relative to our 2 percent longer-run goal. Total personal consumption expenditures (PCE) prices rose 2.6 percent over the 12 months ending in December, and, excluding the volatile food and energy categories, core PCE prices rose 2.8 percent. Longer-term inflation expectations appear to remain well anchored, as reflected in a broad range of surveys of households, businesses, and forecasters, as well as measures from financial markets.” [Emphasis added.] He followed up, “With our policy stance now significantly less restrictive than it had been and the economy remaining strong, we do not need to be in a hurry to adjust our policy stance.  We know that reducing policy restraint too fast or too much could hinder progress on inflation.”  This is largely what was expected as virtually every Fed speaker since the last FOMC meeting has said the same thing, there is no rush to further cut rates. Powell did admit that the neutral rate had risen compared to where it was before inflation took off in 2022 but maintains that current policy is still restrictive. 

However, let’s examine the highlighted comment above a little more closely.  Two things belie that statement as wishful thinking rather than an accurate representation of the current situation.  The first is that the most recent survey released from Friday’s Michigan Sentiment surveys, shows that inflation expectations for the next year jumped dramatically, one full percent to 4.3% as per the below chart.

Source: tradingeconomics.com

Looking over the past 10 years of data, that is a pretty disturbing spike, taking us right back to the 2022-23 period when inflation was roaring.  In addition to that little jump, it is worth looking at those market measures that Powell frequently mentions.  Typically, they are either the 5-year or 10-year breakeven rate.  That rate is the difference between the 5-year Treasury yield and the 5-year TIPS yield (or correspondingly the 10-year yields).  A quick look at the chart below shows that since the Fed first cut rates in September 2024, the 5-year breakeven rate has risen 78bps to 2.64%.  Certainly, looking at the chart, the idea of ‘well anchored’ isn’t the first description I would apply.  Perhaps, rocketing higher?

At any rate, it appears quite clear that the Fed is on hold for a while yet as they await both the evolution of the economy and further clarity on President Trump’s policies on tariffs.  While there is no doubt that we will continue to hear from various Fed speakers going forward, I maintain that the Fed is not seen as the primary driver in markets right now, rather that is President Trump.

Of course, data will still play a role, just a lesser one I believe, but we cannot ignore the CPI report due this morning.  First, remember, the Fed doesn’t focus on CPI, but rather on PCE which is typically released at the end of the month and calculated by the Commerce Department, not the BLS.  But the rest of us basically live in CPI land, so we all care.  If nothing else, it gives us something to complain about as we look incredulously at the declining numbers despite what we see with our own eyes every time we go shopping.

As it is, here are this morning’s median expectations for the data, headline CPI (+0.3% M/M, 2.9% Y/Y) and core CPI (+0.3% M/M, 3.1% Y/Y).  Once again, I believe there is value in taking a longer view of this data for two reasons; first to show that we are not remotely approaching the levels to which we became accustomed prior to the Covid pandemic and government response, and second to highlight that if your null hypothesis is CPI continues to decline, that may not be an appropriate view as we have spent the past 8 months in largely the same place as per the below chart.  Too, note the similarity between the Michigan Survey chart above and this one.

Source: tradingeconomics.com

OK, those are really the stories of the day since there have not, yet, been any new tariffs imposed by President Trump, and traders need to focus on something.  Let’s take a look at how things behaved overnight.

After a mixed US equity session, the strength was in Hong Kong (+2.6%) and China (+1.0%), seemingly on the back of several stories.  First is that China is looking at new ways to address the property bubble’s implosion, potentially allocating more support there, as well as this being a reflexive bounce from yesterday’s decline and the story that President’s Xi and Trump have spoken with the hope that things will not get out of hand there.  As to Japan, the Nikkei (+0.4%) has edged higher as the yen (-0.7%), despite a lot of talk about higher rates in Japan and the currency being massively undervalued, continues to weaken.  In Europe, once again there is limited movement overall with very tiny gains of less than 0.2% the norm although Spain’s IBEX (+0.7%) is the big winner today on some positive earnings results.  US futures are little changed at this hour (7:15).

In the bond market, Treasury yields are unchanged this morning, retaining the 4bps they added yesterday, and in Europe, sovereign yields are also little changed with German Bunds (+2bps) the biggest mover in the session.  JGB yields did rise 3bps overnight, but that seems to be following US yields as there was precious little new news there.

In the commodity markets, yesterday’s metal market declines are mostly continuing this morning with gold (-0.6%) down again, although still hanging around $2900/oz.  Silver has slipped although copper (+0.3%) has arrested its decline.  Oil (-1.1%) is giving back some of yesterday’s gains and continues to trade in the middle of its trading range with no real direction.  One thing I haven’t highlighted lately is European TTF NatGas prices, which while softer this morning (-1.9%) have risen 15% in the past month as storage levels in Europe are declining to concerning levels and global warming has not resulted in enough warm days for the winter.

Finally, the dollar is mixed away from the yen’s sharp decline with the euro (+0.1%) and CHF (+0.2%) offsetting the AUD (-0.3%) and NOK (-0.5%).  It is interesting that many of the financial and trading accounts that I follow on X (nee Twitter) continue to point to JPY and CAD as critical and are anticipating strength in both those currencies imminently.  And yet, neither one is showing much tendency to strengthen, at least for the past month or two.  I guess we shall see, but if the Fed is going to remain on hold, and especially if more tariffs are coming, I suspect the default direction of the dollar will be higher.  As to the EMG bloc, there is virtually nothing happening here, with a mix of gainers and laggards, none of which have moved 0.2% in either direction.

Other than the CPI data, Chairman Powell testifies to the House Financial Services Committee, and we will see EIA oil inventories with a modest build anticipated.  We also hear from two other Fed speakers, but again, with Powell in the spotlight, they just don’t matter.

Markets overall are pretty quiet, seemingly waiting for the next shoe to drop.  My money is on that shoe coming from the Oval Office, not data or Powell, which means we have no idea what will happen.  Stay hedged, but until further notice, I still don’t see a strong case for the dollar to decline.

Good luck

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Norms to Eschew

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For market practitioners, Trump
Is more than a modest speed bump
His willingness to
Most norms to eschew
Can force long-term views to go bump
 
Meanwhile, as the markets prepare
For Powell to sit in his chair
In front of the Senate
A popular tenet
Is more rate cuts he will foreswear

 

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

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

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

Source: worldsteel.org

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

Source: mrssteel.com.vn

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

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

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

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

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

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

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

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

Source: tradingeconomics.com

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

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

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

Good luck

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Loathing and Fear

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On Friday, the jobs situation
Explained there was little causation
For loathing or fear
That later this year
Recession would soon drive deflation
 
Meanwhile, in the Super Bowl’s wake
The president’s set to forsake
Economists’ warning
That tariffs are scorning
Their views, and are quite a mistake

 

Let’s start with a brief recap of Friday’s employment report which was surprising on several outcomes.  While the headline was a touch softer than forecast, at 143K, revisions higher to the prior two months of >100K assuaged concerns and implied that the job market was still doing well.  You may recall that there were rumors of a much higher Unemployment Rate coming because of the annual BLS revisions regarding total jobs and population, but in fact, Unemployment fell to 4.0% despite an increase in the employed population of >2 million.  Generally, that must be seen as good news all around, even for the Fed because the fact that they have paused their rate cutting cycle doesn’t seem to be having any negative impacts.

Alas for Powell and friends, although a real positive for the rest of us, the Earnings data was much stronger than expected, up 0.5% on the month taking the annual result to a 4.1% increase.  Recall, one of Powell’s key concerns is non-core services inflation, and that is where wages have a big impact.  After this data, it becomes much harder to anticipate much in the way of rate cuts soon by the Fed.  This was made clear by the Fed funds futures market which is now pricing only an 8.5% probability of a rate cut in March, down from 14% prior to the data, and only 36bps of cuts all year, which is down about 12bps from before.

Securities markets didn’t love the data with both stocks and bonds declining in price, although commodities markets continue to rally alongside the dollar, a somewhat unusual outcome, but one that makes sense if you consider the issues.  Inflation is not yet dead, hurting bonds, while the fact the Fed is likely to remain on hold for longer supports the dollar.  Stocks, meanwhile, need to see more economic growth because lower rates won’t support them while commodities are seen as that inflation fighting haven.

Of course, it wouldn’t be a day ending in Y if we didn’t have another discussion on tariffs during this administration.  The word is that the president has two things in mind, first, reciprocal tariffs, meaning the US will simply match the tariff levels of other countries rather than maintaining their current, generally lower, tariff rates.  As an example, I believe the EU imposes a 10% tariff on US automobile imports, while the US only imposes a 2.5% tariff on European imports.  The latter will now rise to 10%.  It will be very interesting to see how the Europeans complain over the US enacting tariffs that are identical to their own.  

A side story that I recall from a G-20 meeting during Trump’s first term was that he offered to cut tariffs to 0% for France if they reciprocated and President Macron refused.  The point is that while there is a great deal of huffing and puffing about free trade and that Trump is wrecking the world’s trading relationships, the reality appears far different.  If I had to summarize most of the world’s view on trade it is, the US should never put tariffs on any other country so they can sell with reckless abandon, while the rest of the world can put any tariffs they want on US stuff to protect their home industries.  This is not to say tariffs are necessarily good or bad, just that perspective matters.

The other Trump tariffs to be announced are on steel and aluminum imports amounting to 25% of the value. This will be impactful for all manufacturing industries in the US, at least initially, so we will see how things progress.  Interestingly, the dollar has not responded much here because these are not country specific, so a broad rise in the dollar may not be an effective mitigant.

Ultimately, as I have been writing for a while, volatility is the one true change in things now compared to the previous administration.  Now, with that as backdrop, and as we look ahead to not only CPI data on Wednesday, but Chair Powell’s semi-annual congressional testimony on Tuesday at the Senate and Wednesday at the House, let’s look at how markets have responded to things.

As mentioned above, US equity markets fell about -1.0% on Friday after digesting the Unemployment data. However, the picture elsewhere, especially after these tariff discussions, was more mixed.  In Asia, Japanese shares were essentially unchanged although Hong Kong (+1.8%) was the big winner in the region.  But Chinese shares (+0.2%) did little, especially after news that the number of marriages in China fell to their lowest since at least 1986, another sign of the demographic decline in the nation.  Elsewhere in the region, there was more red (India, Taiwan, Australia) than green (Singapore).  European shares, though, are holding up well, with modest gains of about 0.2% – 0.4% across the board despite no real news.  US futures are also ticking higher at this hour (7:10), about 0.5% across the board.

In the bond market, Friday saw Treasury yields jump 6bps with smaller gains seen in Europe.  This morning, though, the market is far quieter with Treasury yields unchanged and European sovereigns similarly situated, with prices between -1bp and +1bp compared to Friday’s closing levels.  Of note, JGB yields have edged higher by 1bp and now sit at 1.31%, their highest level since April 2010.  With that in mind, though, perhaps a little bit of longer-term perspective is in order.  A look at the chart below shows 10-year JGB yields and USDJPY since 1970.  Two things to note are that they have largely moved in sync and that both spent many years above their current levels.  While it has been 15 years since JGB yields were this high, they are still remarkably low, even compared to their own history.  I know that many things have changed over that time driving fundamentals, but nonetheless, this cannot be ignored.

Source: tradingeconomics.com

Sticking with the dollar, it has begun to edge higher since I started writing this morning and sits about 0.2% stronger than Friday’s close.  USDJPY (+0.5%) is once again the leader in the G10, although weakness is widespread in that bloc.  In the EMG bloc, there were a few gainers overnight (INR +0.3%, KRW +0.3%) although the rest of the world is mostly struggling.  One interesting note is ZAR (0.0%) which appears to be caught between the massive rally in gold (to be discussed below) and the increased rhetoric about sanctions by the US in the wake of the ruling party’s ostensible call for a genocide of white South Africans to take over their property.  This has not been getting much mainstream media press, but it is clear that Mr Trump is aware, especially given that Elon Musk is South African by birth.  However, there is no confusion in the South African government bond market, which, as you can see below, has seen yields explode higher in the past week since this story started getting any press at all.

Source: tradingeconomics.com

Finally, the commodity markets continue to show significant movement, especially the metals markets.  Gold (+1.6%) is now over $2900/oz, another new all-time high and calling into question if this is just an arbitrage between London and New York deliveries.  Silver (+1.4%) continues to be along for the ride as is copper (+0.6%) which is the biggest gainer of the past week, up more than 7%.  Ironically, aluminum, the only metal where tariffs are involved, is actually a touch softer this morning.  As to oil (+1.2%) while the recent trend remains lower, it does appear to be bottoming, at least if we look at the chart below.

Source: tradingeconomics.com

Turning to the data this week, it will be quite important as CPI headlines, but we also see Retail Sales and other stuff and have lots of Fedspeak.

TuesdayNFIB Small Biz Optimism104.6
 Powell Testimony to Senate 
WednesdayCPI0.3% (2.9% Y/Y)
 -ex food & energy0.3% (3.1% Y/Y)
 Powell Testimony to House 
ThursdayPPI0.3% (3.4% Y/Y)
 -ex food & energy0.3% (3.3% Y/Y)
 Initial Claims216K
 Continuing Claims1875K
FridayRetail Sales-0.1%
 -ex autos0.3%
 IP0.2%
 Capacity Utilization77.7%

Source: tradingeconmics.com

In addition to Powell, we will hear from five more Fed speakers, although with Powell speaking, I imagine their words will largely be ignored.  Overall, the world continues to try to figure out how to deal with Trump and his dramatic policy changes from the last administration.  One thing to keep in mind is that so far, polls show a large majority of the nation remains in support of his actions so it would be a mistake to think that his policy set is going to be altered.  Net, the market continues to believe this will support the dollar, as will the fact that the Fed seems less and less likely to start cutting rates soon.  Keep that in mind as you consider your hedges going forward.

Good luck

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Not in a Hurry

Posted on by

Said Powell, we’re not in a hurry
To cut after last year’s late flurry
Instead, wait and see
Is likely to be
The future lest ‘flation hawks worry

 

The opening paragraph of the FOMC Statement was concise as they acknowledge that things aren’t too bad right now.  “Recent indicators suggest that economic activity has continued to expand at a solid pace. The unemployment rate has stabilized at a low level in recent months, and labor market conditions remain solid. Inflation remains somewhat elevated.”  

Of course, that didn’t stop Chairman Powell from still describing rates as restrictive or “meaningfully above” the neutral rate, although in fairness, he did explain “We do not need to be in a hurry to adjust our policy stance.”  When asked about the impact of President Trump’s mooted policies regarding tariffs and trade, he explained, “The committee is very much in the mode of waiting to see what policies are enacted. We need to let those policies be articulated before we can even begin to make a plausible assessment of what their implications for the economy will be.”

In the end, I don’t believe very much changed with respect to expectations for the Fed with the futures market still pricing in a total of 46 basis points of cuts for the rest of the year with just an 18% probability of a cut in March.  Certainly, nothing we heard or saw today changed my view of rates remaining here and potentially going higher before the end of 2025.  But for now, I don’t think there is much else to say on the subject.

In Europe, the data was bleak
As growth there remains awful weak
Today they’ll cut rates
And on future dates
A base rate much lower they’ll seek

As we await the ECB’s meeting announcement later this morning, where Madame Lagarde is virtually certain to cut their interest rate structure by 25bps, we were entertained by GDP data from the Eurozone as well as several of its members.  The numbers were disappointing even compared to weak forecasts.  For instance, in Q4, France (-0.1%) and Germany (-0.2%) both saw declining activity while Italy (0.0%) managed to not fall.  Not surprisingly, the Eurozone, as a whole, also saw a result of 0.0% GDP growth in Q4.  In every case, the annual number is below 1.0%.  Of course, if just looking at this data, it would be easy to say the ECB needs to cut rates further.  However, inflation remains uncomfortably higher than target and as evidenced by Spanish data this morning, showing it rose to 3.0% Y/Y in January, Madame Lagarde cannot ignore the sole ECB mandate of stable prices at 2.0%.

Under the rubric a picture is worth a thousand words, I think the chart below of quarterly GDP activity in Germany and the Eurozone speak volumes of how things are progressing on the continent. 

Source: tradingeconomics.com

The current policy mix in Europe is clearly not getting the job done, assuming the job is to grow the economy in a non-inflationary manner.  While the ECB can continue to cut rates in their effort to support growth, the problems on the continent have far more to do with energy policy than anything else.  The focus on ending the use of fossil fuels has resulted in the highest energy costs of any region which has led to the steady deindustrialization of the continent.  It doesn’t really matter where interest rates are if companies cannot power their operations and that is the crux of the ECB’s problems.  No matter what Lagarde and her friends do, it cannot reverse this decline.  If you were wondering why so many, including this poet, are negative on the euro’s prospects going forward, this is it in a nutshell.

Ok, let’s turn to the overnight market activity.  First, a moment’s thought for the tragedy that took place in Washington DC last night where a commuter jet collided with a military helicopter near Reagan National Airport.  As I write, it is not known how many fatalities occurred, but the word is there were 60 passengers plus crew on board the plane and 4 on the helicopter.

Yesterday’s US session was less positive than many had hoped with the specter of DeepSeek still haunting many investors but the situation in Asia was a bit more upbeat with the Nikkei (+0.25%) and Australia (+0.55%) both showing gains.  I read an entire X post as to why the next Chinese stimulus package was really going to change things and support the economy there although I continue to remain skeptical. (As an aside, it is Chinese New Year, the year of the snake, so markets in China and Hong Kong are closed for a few days.). Meanwhile, in Europe, all markets are higher as traders anticipate not only today’s ECB rate cut, but clearly more in the future as economic activity continues to wane.  So, gains across the board of between 0.35% (DAX) and 0.7% (IBEX).  US futures, too, are higher this morning, up by 0.4% at this hour (6:50).

In the bond market, yields are sliding as Treasuries (-3bps) are sitting right on 4.50% after Chairman Powell seemed to indicate they actually do care about inflation.  Meanwhile, European sovereign yields are all lower by between -6bps and -7bps ahead of the ECB announcement and responding to the weak GDP data.  Clearly, investors on the continent are convinced there are more rate cuts coming.  On the other side of that rate coin, JGB’s saw yields climb 2bps as Deputy BOJ Governor Himino indicated that further rate hikes would be appropriate given Japanese real interest rates remain negative.  Not only did that support JGB yields, but the yen (+0.5%) was also a beneficiary.  Finally, I would be remiss to ignore the Brazilian central bank, which hiked rates 100bps last night, taking their SELIC rate to 13.25%!  (And equity investors in the US complain rates are too high!)

In the commodity space, oil (-0.1%) is little changed this morning although remains near the bottom of its recent trading range.  There is so much discussion regarding what will happen here, whether Trump will be able to encourage more drilling in the US, how OPEC is going to respond to both Trump and the market, and what is going to happen in the Russia/Ukraine war, that it is very difficult to get a good handle on things.  Nothing has changed my long-term view that there is plenty of oil around and it is a political decision, not a technical nor geological one, that will determine the price.  As to metals markets, gold (+0.65%) continues to perform well and edges closer to the all-time high levels reached back in late October.  There is much discussion about the arbitrage between COMEX and LME gold with many deliveries apparently due in NY and not enough 100toz bars available.  This may be driving prices higher as those with short positions scramble to either roll their positions are get ready for delivery.  As to silver (+0.4%) and copper (+0.2%), they are both along for the ride.

Finally, the dollar is mixed this morning as while it is modestly stronger vs. some G10 counterparts (EUR -0.2%, SEK -0.2%), the yen’s strength is moderating the overall movement.  Versus its EMG counterparts, BRL (-0.8%) is the most notable mover as traders take profit after the BCB’s rate hike last night.  It was widely assumed to occur and real rates in Brazil are now nearly 9%, a very attractive level that has helped the currency appreciate more than 6% in the past month.  However, elsewhere, the movement is basically random.

On the data front, aside from the ECB rate decision, we see the weekly Initial (exp 220K) and Continuing (1890K) Claims data and the first look at Q4 GDP (exp 2.6%). Yesterday’s Goods Trade Balance was a record deficit of -$122.1 Billion as it appears many companies were ordering stuff to get ahead of the threatened tariffs.  Also, yesterday the BOC cut rates by 25bps, as widely expected, but nobody really noticed.  With the Fed sidelined for now, I suspect that we will continue to follow the equity stories more closely than the macro ones, although we do see PCE tomorrow, so a big surprise there could certainly impact the narrative.  But for now, it remains difficult to be too bearish the dollar.

Good luck

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Stardom is Fleeting

Posted on by

Remarkably few people care
That Jay and the Fed will soon share
Their latest impressions
On growth and recessions
An outcome, of late, that’s quite rare
 
Does this mean that ere the next meeting
There will be an increase in bleating
By every Fed speaker
Each one a fame seeker
As they realize stardom is fleeting?

 

I wonder how the atmosphere in the meeting room at the Marriner Eccles building has changed today vs. what it has been for the past decade at least.  Usually, the FOMC meets, and financial markets are riveted by the potential and then everything comes to a virtual standstill as traders and investors await the wisdom of the Fed Chair to help determine where markets are likely to go.  I am reminded of the crop report scene in Trading Places, where the entire pit stops to watch the news and then springs back into action. 

One of the consequences of this evolution is that every member of the FOMC feels it is their duty to reiterate their views as frequently as possible, whether they are changing or not, because they are trying to increase their profile to ensure a lucrative future gig want to make sure that the American people understand just how much the Fed is doing to help them and the nation.  This is why for the first four weeks after a Fed meeting, virtually every day we have at least one if not two or three FOMC members repeating themselves ad nauseum.

But suddenly, they have real competition for airtime.  President Trump, no shrinking violet he, is incredibly adept at forcing all the world’s attention on himself, to the exclusion of formerly important voices like Alberto Musalem or Lisa Cook.  Now, the fact that you can probably not remember who those two people are is exactly my point.  FOMC members speak constantly, but it is the office, not the voice, to which people are listening.  And right now, fewer and fewer people are listening to the Fed because President Trump is commanding all the attention.  In fact, to the extent the Fed is discussed, it is generally in relation to how they are going to respond to Trump’s next moves.

But, in an effort to maintain our focus on markets and not politics, to the extent that is possible right now, the Fed still has a role to play in both expectations of how things are going to evolve as well as actual pricing.  A quick summation of where we have been with Powell and friends is that last year, starting in September they cut rates for the first time in nearly two years and have since reduced the Fed funds rate by 100bps.  A key issue here is the fact that the economy is showing no signs of slowing down, unemployment remains modest at best, and inflation has been, at best, bottoming well above their 2.0% target, if not rising again.  Hence, there have been many questions as to why they cut rates at all.

At this point, though, the Fed’s narrative prior to the quiet period, was one of increased caution that further rate cuts may not be necessary, or certainly not imminent, given the ongoing positivity in the economic situation.  As such, there is no expectation for a rate cut today, and according to the Fed funds futures market, only a 30% probability of a March cut, with basically two full cuts priced in for all of 2025.  I would argue that based on the data we have seen, it is not clear why there would be any further cuts, and, in fact, believe that by mid-year, we are likely to start to hear talk of a rate hike before the end of the year.  This will be dependent on the data, but if inflation continues to remain sticky (see chart of Core PCE below), the bar for cuts will move higher still.  Certainly, to my non-PhD trained eye, it doesn’t really look like their key metric is declining anymore.

Source: tradingeconomics.com

Perhaps the most remarkable thing about this Fed meeting is that I have seen virtually nothing regarding expectations of how the statement may change or forecasts may change.  FWIW, which is probably not much, my take is the statement will be virtually identical given no real changes in the data trends, and that Chairman Powell will go out of his way to say absolutely nothing at the presser, especially when asked about President Trump and his policies.  Of course, this will not prevent the cacophony of Fedspeak that will come between now and the next meeting, but there may be fewer folks paying attention.

Ok, let’s turn to markets.  While Monday was a tech stock rout, yesterday was the reverse with the NASDAQ shaking off the DeepSeek fears or actually embracing them based on Jevon’s Paradox (the idea that the more efficient something becomes, the greater the need/desire for it and therefore the increase in its price) leading to the new narrative that Nvidia’s chips will be in more demand.  But regardless, everybody was happier!  Asian markets responded with the Nikkei (+1.0%) regaining some luster on the tech story as well as the weaker JPY, which saw the dollar rally a full yen on the session, although it is little changed overnight.  While not universal, there was a lot more green than red in Asia, although Chinese shares (-0.4%) did not participate.

In Europe, most bourses are showing gains this morning although the CAC (-0.3%) is lagging after luxury goods makers saw weaker growth than expected.  But the DAX (+0.75%) and IBEX (+1.0%) are both stronger as is the FTSE 100 (+0.3%) as Chancellor Reeves continues to try to explain that growth is Labour’s goal despite all their policies that seem to point in the other direction.  As to US futures, at this hour (7:30) they are higher led by the NASDAQ (+0.5%).

In the bond market, the fear from Monday is gone although the bounce in yields was modest yesterday and this morning Treasury yields are unchanged on the session.  I suspect that there is some waiting for the Fed involved here.  European sovereign yields, though, are all a bit lower, down between -2bps and -3bps, as investors anticipate tomorrow’s ECB rate cut and are looking for a dovish message going forward.

In the commodity space, yesterday modest rebound in oil (-0.6%) is being reversed this morning while NatGas (0.0%) is consolidating after a dramatic decline in the past week of more than 20% given the latest weather models are now calling for much warmer temperatures in the northern hemisphere.  In the metals markets, gold (-0.2%) is consolidating yesterday’s gains as is silver (+0.2%) and copper (-0.1%).  For now, these are not all that interesting.

Finally, in the FX markets, the dollar continues to regain momentum higher with the euro (-0.3%) sliding back below 1.04 this morning and the DXY (+0.2%) back above 108.00.  However, looking across both the G10 and EMG blocs, while the dollar’s strength is widespread, it is not dramatic, with AUD (-0.5%) and PLN (-0.5%) the biggest movers of the session.  It should be no surprise that there is confusion here given the uncertainty sown by President Trump and his tariff discussions.

On the data front, the only numbers today, aside from the FOMC meeting and the BOC meeting (expected 25bp cut) is the Goods Trade Balance (exp -$105.4B).  We also get the EIA oil data with inventory builds anticipated.  But really, despite the seeming lack of interest leading up to today’s FOMC meeting, it is the only game in town.  To me, the risk is something more dovish as that part of the narrative seems to be ebbing lately, so will be a real surprise.  If that is the case, then I suspect the dollar will suffer somewhat.

Good luck

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Havoc the Dollar Will Wreak

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Apparently, President Xi
Is starting to listen to me 🤣
His currency’s falling
As he stops forestalling
The weakness in his renminbi
 
But it’s not just yuan that is weak
The havoc the dollar will wreak
Is set to keep growing
As funds keep on flowing
To US investments, still chic

 

It seems that one of President Xi Jinping’s New Year’s resolutions was to finally allow the renminbi to resume its longer-term decline.  While 7.30 has been the line in the sand for a while, as can be seen from the first chart below, suddenly, as the calendar page turned to 2025, it appears that the PBOC is going to allow for the renminbi to weaken further.  Thus far, the PBOC has been adamant about fixing the Chinese currency at levels much stronger than anyone wants to pay for it, and even last night that was the case, with a fixing rate of 7.1878.  However, while the onshore market must trade within +/- 2% of that fixing rate, no such restriction limits the offshore market, and this morning, the offshore renminbi is trading 2.3% weaker than the fixing, above 7.35 to the dollar.

Much has been made of the “chess” moves that are ongoing between the US and China regarding currency policy with many pundits blankly claiming that if Trump is to impose the threatened tariffs, the renminbi will simply weaken to offset them.  However, while I do believe the CNY has much further to fall, that is not the driving case I see.  Rather, Xi’s problem is that his economy is not in nearly as good condition as he needs it to be and confidence in the consumer sector continues to wane.  This is largely a result of the ongoing destruction of the property bubble that was blown for decades.

Remember, Chinese investors have tied up significant personal wealth in second and third homes as stores of value.  This was encouraged as cities could sell property to developers, get paid a bunch to help finance their operations, and since demand was so high, prices kept rising so everyone was happy.  Alas, as with all bubbles (I’m looking at you, too, NASDAQ) eventually the air comes out.  For the past three years the Chinese have been trying to deal with this collapsing property market, but house prices continue to decline thus reducing investor wealth and confidence.  I read that there are an estimated 80 million empty homes that have been built over the past decades and are now in disrepair in the countryside.  These are the ghost cities that were all part of the Chinese growth miracle, but in fact were simply massive malinvestment.

While the prescription for China has long been to increase its consumer sector of the economy, Xi and his minions at the central committee have no idea how to do that (given they are communist, this is not that surprising) and so continue to support the means of production.  The problem is they have now seemingly gone too far in that space as well with not merely the Western world, but also much of the developing world starting to push back on all the excess stuff that is coming from China.  

Xi’s other problem is that as he rails against the dollar and seeks others to use the renminbi in their trade, if the currency starts to fall sharply, that will be a difficult ask.  Given the US FX policy remains benign neglect, it is entirely upon China to solve their own problems.  While it is unlikely to happen in a big devaluation a la August 2015, weakness is the trend to bet here this year.

Source: tradingeconomics.com

Source: tradingeconomics.com

Away from that news, though, the year is starting off in a fairly modestly.  Most of the world’s focus is on the upcoming Trump inauguration as well as the political machinations that will begin today as Trump’s Cabinet nominees start to go through their paces in front of the Senate.  New Year’s Eve’s horrifying terrorist attack in New Orleans has just upped the ante with respect to Trump getting his picks through the process.  

So, let’s review the overnight market activity to get a sense of what today could bring.  The first day of the US trading year resulted in modest declines across the board in equities, although as I type (7:30), they appear to be retracing those losses and are slightly higher.  The bigger news was from Asia where both the Nikkei (-1.0%) and CSI 300 (-1.2%) showed weakness with the former feeling the pain of some profit taking after gains last week, although Chinese shares seem to be succumbing to the troubles I have described above.  Elsewhere in the region there was no consistency with gainers (Hong Kong, Taiwan, Korea and Australia) and losers (India, New Zealand, Malaysia) with other exchanges little changed.  In Europe this morning, there is more red than green with the CAC (-0.8%) the biggest laggard amid concerns over the fiscal situation in France.  But the DAX (-0.35%) and FTSE MIB (-0.45%) are also lagging with only Spain’s IBEX (0.0%) bucking the trend.

In the bond market, Treasury yields have slipped 2bps this morning, but remain above 4.50%, something that continues to vex Chairman Powell as he and the Fed seemed certain that by cutting the Fed funds rate, he would drive the entire yield curve lower.  I wonder if he will learn this lesson about the relation between a made-up rate (Fed funds) and market rates (bond yields) anytime soon.  In Europe, French yields are 2bps higher, widening their spread vs. German bunds and perhaps more remarkably, at least from a nominal perspective, well above Greek government bond yields now! (Remember, there are far fewer GGB’s around than OAT’s so there is a scarcity bid there). Certainly, Madame Lagarde must be getting a bit concerned over her native nation’s profligacy and I suspect that the fiscal ‘need’ for lower Eurozone interest rates is one of the features of the discussion regarding the ECB’s future path (lower).  As to JGB’s, they are unchanged, sitting at 1.07% and showing no sign of rising anytime soon.  One last thing, Chinese 10yr bonds now yield a new record low of 1.61%, 2bps lower on the day and pretty convincing evidence that not all is well in the Middle Kingdom’s economy.

On the commodity front, oil (-0.2%) is consolidating yesterday’s strong gains which were ostensibly based on the idea that President Xi will successfully implement more stimulus and aid growth in China.  History shows otherwise, but we shall see.  Gold (-0.1%) is also consolidating yesterday’s strong gains as it appears there has been renewed central bank buying activity to start the year.  The other metals also benefitted yesterday with silver (+0.8%) continuing this morning.

Finally, the dollar is retracing some of yesterday’s gains but remains much stronger than we saw just last week, and certainly since the last time I wrote.  Looking at the Dollar Index, it is hovering near 109 this morning, having traded well above that yesterday afternoon.  The next obvious technical target is 112, about 3% higher and there are now many calls for a test of the 2002 highs of 120.  I assure you, if the DXY gets to those levels, EMG currencies are going to come under a great deal of pressure.  As an example, we already see several EMG currencies (CLP, BRL) trading at or near all-time lows (dollar highs) and there is nothing to think this will change soon.  As well, check out the euro at 1.03 this morning, which while 0.3% higher on the session, appears as though it could well test those October 2022 lows (dollar highs) sooner rather than later, especially if the ECB continues to lean more dovish than the Fed.  If you are a receivables hedger, currency puts seem like a pretty good idea these days.

On the data front, ISM Manufacturing (exp 48.4) and Prices Paid (51.7) are all we have today and late this morning Richmond Fed president Barkin speaks.  Interestingly, tomorrow evening and Sunday we hear from SF Fed President Daly and tomorrow evening Governor Kugler will be joining Daly.  I guess they can’t go but so long without hearing their voices in the echo chamber!

There is nothing to suggest that the dollar, while modestly softer today, is set to turn around soon.  Keep that in mind.

Good luck and good weekend

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Tempt the Fates

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Inflation just won’t seem to die
No matter what Jay and friends try
Will he tempt the fates
To once more cut rates?
And if so, will bond yields comply?

 

It took until 1:10pm yesterday for Nick Timiraos at the WSJ to publish his article regarding the fact that Strengthening Inflation Poses Challenge for Trump, Fed.  I find the title of the article interesting as, to the best of my knowledge, Mr Trump has yet to take office and enact any policies.  But I suppose if Chairman Powell doesn’t like Trump (which seems to be the widely held view) he wanted to ensure his mouthpiece took a dig and distracted the audience from Powell’s problems.

Regardless, yesterday’s CPI report was a bit firmer than forecast, at least at the second decimal place, which is enough for the punditry to discuss.  Of course, it is remarkable that a statistic of this nature is considered down to the second decimal place given the broad uncertainty over its measurement overall.  However,  looking at the chart below, which shows the monthly CPI readings for the past ten years, it is not hard to see that monthly inflation bottomed back in June and appears to be finding a new home at the 0.3% or higher level.  

Source: tradingeconomics.com

I showed the 10-year chart to also highlight that pre-Covid, the monthly readings were somewhere between 0.1% and 0.2% consistently.  My point is that 0.3% per month annualizes to about 3.7% which is as good a guess as any for how inflation is going to play out going forward absent some major fiscal and monetary changes.

Aside from the fact that this is important because we all suffer the consequences in our daily lives, from a markets perspective, I believe this is the money line in the article [emphasis added], “Officials have indicated sticky inflation could lead them to slow the pace of rate reductions or stop altogether.”  Yet, despite this strong hint that the Fed is getting uncomfortable with the market’s current assessment of how much further Fed funds are going to decline, the futures market is pricing a 98.6% probability of a cut next week.  

In fairness, the market is now pricing only two more rate cuts after next week for all of 2025, a number that has been declining slowly over the past month.  But ask yourself how the Fed will behave if their firmly held belief that inflation is still heading toward their 2% goal starts to falter under the weight of continued high readings.  There are a few analysts who are discussing rate hikes for next year for just this reason.  That, my friends, would upset the apple cart!

The central bank theme of the week
Is current rates need quite a tweak
Despite CPI
That’s still on the fly
More havoc, these bankers, will wreak
 
Down Under, though they didn’t cut
The doves’ case was open and shut
The Swiss and Canucks
Made changes, deluxe
While Christine, a quarter, will strut

While we are beginning to see some changes in the market’s perception of the Fed’s future path, those changes are not obvious elsewhere.  So far this week, the RBA left rates on hold, as they had promised, but explained the need to cut was upon them, demonstrating far less concern over inflation than in the past.  You may recall that the AUD fell sharply after the RBA statement put cuts in play going forward.  Then, yesterday, the BOC cut 50bps, as expected, as they, too, have turned their focus to economic activity and away from inflation, which continues above their target.  This morning, the Swiss National Bank surprised the markets with a 50bp cut, taking their base rate back down to 0.50%, expressing concern that inflation was slowing too rapidly and could become a problem.  Finally, shortly the ECB will announce their policy rate with the market highly confident a 25bp cut is on the way, although there are a few looking for 50bps.

The funny thing about all these cuts is that other than Switzerland, where recent CPI readings were at 0.7%, inflation remains above target levels and is demonstrating the same type of behavior as in the US, where it bottomed during the summer and is rebounding.  As well, especially in Europe, unemployment does not appear to be a major problem in these nations.  This begs the question, why are central banks so keen to cut rates if inflation remains sticky above their target levels and economic activity is hanging on?  

I have no good answer for this although I suspect there may be significant pressure from finance ministries regarding the cost of all that government debt that is outstanding and needs to be refinanced.  Alas, even though almost every central bank’s primary mandate is to maintain low inflation, it has become clearer by the day that following that mandate is not seen as important as other concerns.  Whether those concerns are economic activity or financing outstanding debt, or perhaps something else, I fear that we are heading back into a world where higher inflation is going to be the norm everywhere in the world.  Plan accordingly.

Ok, after another couple of record high closes in the US yesterday, let’s see how things have played out ahead of the ECB this morning.  In Asia, both Japan (+1.2%) and China (+1.0%) rallied on the brightening tech outlook, the prospect of further rate cuts and the ongoing hopes for that Chinese bazooka to finally be fired.  As well, Hong Kong (+1.2%) and Korea (+1.6%) also fared well, although the rest of the region was more mixed on much smaller movement.  In Europe, the best description ahead of the ECB is unchanged, with every bourse within 0.1% of Wednesday’s closing levels.  US futures at this hour (7:15) are pointing modestly lower, however, down about -0.2%.

In the bond market, despite all the surety of rate cuts, investors are not comfortable holding duration, and we are seeing yields continue to rise across the board.  Treasury yields are higher by another 3bps and back to 4.30% while European sovereign yields are all higher by between 3bps and 5bps.  It seems the bond markets are not convinced that central banks are behaving properly.  Perhaps the “bond vigilantes” will truly make a return after all.

In the commodity markets, oil (+0.1%) which managed to capture the $70/bl level is holding on this morning after the IEA raised its demand forecast for 2025 based on increased expectations for Chinese demand (because of the stimulus that is expected.). In the metals market, that Chinese stimulus is helping copper (+0.5%) although the precious sector is consolidating yesterday’s gains with gold (-0.3%) backing off slightly and silver unchanged.  However, gold is back above $2700/oz and appears to have finished its consolidation.

Finally, the dollar is mixed this morning, broadly holding onto its recent gains, but seeing some weakness against specific currencies.  For instance, BRL (+1.0%) responded to the fact that the central bank there, bucking the global trend, hiked the Selic rate by 100bps, a quarter point more than expected, as their concern over rising inflation increases.  (It seems they are one of the few central banks that is focused on their job, not the politics!). But away from that outlier move, we see AUD (+0.45%) rising on stronger than expected jobs growth data while NOK (+0.4%) is continuing to benefit from oil’s recent gains.  On the flip side, CHF (-0.35%) is suffering for the larger than expected SNB rate cut and GBP (-0.2%) is under modest pressure as traders debate whether the BOE will cut rates next week or not.

On the data front, Initial (exp 220K) and Continuing (1880K) Claims lead the way alongside PPI (0.2%, 2.6% Y/Y headline, 0.2%, 3.2% Y/Y core) at 8:30 this morning.  Beyond that, there is a 30-year auction this afternoon and that is really it.  I don’t see PPI having a great deal of impact and with CPI behind us, and Timiraos having told us that the Fed is going to slow the pace of cuts, I’m not sure what else there is to watch.  Obviously, this morning’s ECB meeting matters, but really, it is hard to get overly excited about the outcome there.  I suspect that attention will now be focused on the FOMC next week, with much more concern over the dot plot and SEP than the 25bp cut that seems a foregone conclusion.  

If the Fed is truly slowing the pace of cuts, once again, it becomes difficult to see how the dollar will soften vs. its major counterparts. Keep that in mind for now.

Good luck

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