Tag Archives: #Powell

Not in a Hurry

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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

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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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To Further Debase

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Said Jay, “The economy’s strong”
But rate cuts before weren’t wrong
We’re in a good place
To further debase
Your dollars and will before long
As we slow the pace
Of policy ease all year long

 

Chairman Powell regaled the market for the last time before the Fed’s quiet period begins tomorrow evening and here are the three comments that seem to explain his current views. 

  • “We wanted to send a strong signal that we were going to support the labor market if it continued to weaken.”
  • “The economy is strong, and it’s stronger than we thought it was going to be in September.”
  • “The good news is that we can afford to be a little more cautious as we try to find a rate-setting that neither spurs nor slows growth.”

My read is he was trying to make an excuse for the 50bp cut that started the process in September as there is still no justification for that move.  However, he essentially reiterated his last remarks of the Fed not being in a hurry to cut rates further.  As it happens, SF Fed president Mary Daly also explained, “We do not need to be urgent. There’s no sense of urgency, but we do need to continue to carefully calibrate our policy and make sure it’s in line with the economy we have today the one we expect to have going forward.” 

Now, a funny thing happened to me yesterday as I read those comments, and my expectation was that the Fed funds futures market might reduce the probability of a December rate cut.  After all, we just heard from the Chairman that things are good and they can be cautious about further cuts, while another member expressly said there was no urgency to cut.  But in fact, the 74% probability this morning is unchanged from yesterday’s level and the punditry remains very convinced that they are going to cut next week despite their caution.  It seems that my understanding of caution and Powell’s are somewhat different.  However, his understanding is the one that matters, so it appears absent a major upside surprise in both NFP tomorrow and CPI next week, a cut is coming on the 18th.

The French president, M. Macron
May soon find himself overthrown
His PM is out
And there is great doubt
‘Bout any new views he has shown

The other topic of note this morning is the collapse of Monsieur Macron’s minority government in France.  This was the widely expected outcome that markets had priced in, so there has been little in the way of impact there.  However, the bigger picture impact is about the structure of the Eurozone (and EU) and its rules.  After all, if the second largest economy in the group is not merely floundering economically, but essentially leaderless, the concept of a coherent set of plans to oversee the Eurozone seems a bit of a stretch.

Macron’s term is not up until 2027, and he has consistently maintained he will not step down early, but there are increasing calls for him to do just that.  Members of parliament on both the left and right, although not Marine Le Pen, the RN’s leader, have been vocal on the subject and a recent poll by Cluster17 for Le Point magazine showed that 54% of the French public wanted him to step down as well.  Now, you know as well as I that absent a criminal conviction, the odds of an elected official stepping down anywhere in the world approach zero and I expect nothing less from Macron.  At the same time, French law prevents another parliamentary election for 12 months after the last, which means July.  At that time, one will almost certainly be called, and it will be interesting to see how that plays out.  

However, in the meantime, it seems likely that France will be floundering with no ability to address fiscal issues, be they spending or deficit focused.  This cannot be a positive for the single currency, especially if France slips into recession.  Again, despite all the concerns over the dollar and the untenable fiscal deficits, things in Europe appear far worse.  Parity in the euro and below seems a far better bet over the next 6 months than the opposite.  While the euro (+0.2%) has bounced slightly this morning, a look at the chart below indicates, at least to me, that the trend is distinctly lower.

Source: tradingeconomics.com

And with that, let’s look at the overnight session in markets.  Continuing in the FX world, that modest euro gain is descriptive of the market as a whole, with the dollar slightly softer this morning, although few currencies showing any notable strength.  I suspect much of this is based on the idea that the Fed will cut rates soon despite the “strong economy”.  In truth, in the G10, no currency has moved more than 0.2% and even in the EMG space, only ZAR (+0.4%) and HUF (+0.5%) have climbed more.  Those moves, which don’t appear to have any fundamental drivers, seem more likely to be expressions of the fact those markets are more volatile than the G10.

In the equity markets, yesterday’s US rally, to new all-time highs across the board, saw a mixed review in Asia with the Nikkei (+0.3%) edging higher but both Hong Kong (-0.9%) and Shanghai (-0.25%) slipping a bit.  The rest of Asia was also mixed with Korea (-0.9%) still suffering from the bizarre happenings there yesterday but other markets performing well (India +1.0%, Singapore +0.6%).  In Europe, only the UK (-0.1%) is under water this morning although the CAC (+0.2%) is the continental laggard.  Spain’s IBEX (+1.2%) is the leader on the back of stronger IP, and although Eurozone Retail Sales were much weaker than expected, it has not seemed to impact investor views.  As to US futures, they are little changed at this hour (7:30).

In the bond market, Treasury yields have backed up 3bps and I am beginning to sense that there is a negative correlation to the probability of a Fed rate cut and the 10-year yield.  As that probability rises, bonds sell off further, but that is merely an anecdotal observation, I have not done the math.  In Europe, yields are mixed, but within 1bp of yesterday’s closing levels with even French yields slipping 1bp. It will be very interesting to see how the European Commission handles the fact that the French budget deficit is so far above the targeted 3% level and now without a government, there is no way to address the situation.  The original idea when the euro was formed was that governments would be fined if they broke the policy caps on debt and deficits.  Of course, no fine has ever been imposed and I don’t suppose one will be now.  (However, if Marine Le Pen’s RN wins the election next summer, you can be sure they will seek to impose fines on her government!)

Finally, in the commodity markets, it is very quiet this morning.  Oil (+0.3%) is edging higher after a big rise and fall yesterday.  The rise was the result of a steep draw in US inventories, but the decline seemed to be a response to OPEC+ confirming they will be increasing production at some point in 2025.  Meanwhile, metals markets are basically unchanged this morning.

One other thing I have not discussed but is obviously getting a lot of press this morning, is Bitcoin which traded through $100K yesterday after President-elect Trump named Paul Atkins to be his new SEC Chair.  Atkins has a very pro crypto bias, and I expect we will see far more impetus in the crypto space going forward, not just in Bitcoin.

On the data front, yesterday’s ISM data was a bit softer than forecast while the Beige Book explained that economic activity rose slightly in the past month along with employment and prices, but all movements were quite modest.  This morning, we see Initial (exp 215K) and Continuing (1910K) Claims as well as the Trade Balance (-$75.0B) and later we hear from Richmond Fed president Barkin.  

Looking at the overall situation, investors continue to ignore any potential problems and run to risk assets, as evidenced by the rally in Bitcoin and new highs in stock prices.  Unless we see some really surprising data, either crazy strong implying the Fed is going to stop easing, or crazy weak implying we are in a recession, I see no reason for this process to end heading into the new year and President Trump’s inauguration.  Again, in that scenario, I think you have to like the dollar higher.

Good luck

Adf

In a Plight

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The Minutes explained that the Fed
Is confident, looking ahead
They’ve conquered inflation
Although its duration
May last longer than they had said
 
They still think their policy’s tight
And truthfully, they may be right
But if they are not
And ‘flation’s still hot
They might find themselves in a plight

 

Below are a couple of key passages from the FOMC Minutes which show that the Fed continues to put on a game face when it comes to their performance.  Although some participants have begun to hedge their bets, it is clear the majority of the committee remains convinced that despite the broad inaccuracies of their models over the past forty four years, they are still on track to achieve their objectives.  

“Participants anticipated that if the data came in about as expected, with inflation continuing to move down sustainably to 2% and the economy remaining near maximum employment, it would likely be appropriate to move gradually toward a more neutral stance of policy over time.”

“Participants indicated that they remained confident that inflation was moving sustainably toward 2%, although a couple noted the possibility that the process could take longer than previously expected.”  [emphasis added]

And this morning, they will get to see if their confidence has been rewarded with the release of the October PCE data (exp 0.2%, 2.3% Y/Y headline; 0.3%, 2.8% Y/Y core).  One of the tell-tale signs that they are losing confidence is there has been more discussion about the vagaries of where exactly the neutral rate lies as evidenced by the following comment.  

“Many participants observed that uncertainties concerning the level of the neutral rate of interest complicated the assessment of the degree of restrictiveness of monetary policy and, in their view, made it appropriate to reduce policy restraint gradually.”

Once upon a time, the Fed was the undisputed master of markets, and their actions and words were the key drivers of prices across all asset classes.  However, not dissimilar to what we have seen occur regarding other mainstream institutions and their loss in respect, the same is happening at the Marriner Eccles Building I believe.  Chairman Powell, he of transitory inflation fame, is a far cry from the Maestro, Alan Greenspan, let alone Saint Volcker, and my observation is that more and more market participants listen to, but do not heed, the Fed’s words.

My read is the Fed has it in their mind that they need to continue to cut rates because the committee members have not lived through periods when interest rates were at current levels for any extended length of time.  They still fervently believe that their policy is restrictive, despite all the evidence to the contrary (record high stock prices and GDP expanding above potential) and so seem afraid that if they don’t cut rates they will be blamed for a recession.  I would argue the market interpretation of the Minutes was dovish as shown by the Fed funds futures market increasing the probability of a December cut to 66%.  Remember, Monday it was 52%.  My cynical view is the reason Powell wants to cut is his friends in the Private Equity space are suffering and he wants to help, because really, given both the inflation and economic activity data, it does not appear a cut is warranted.

Turning our attention elsewhere, there is a story going round that China is preparing to fire that bazooka this time…for real.  At least that’s what I keep reading on X, and certainly, Chinese equity markets rallied on something (CSI 300 +1.75%, Hang Seng +2.3%), but I cannot find a news story explaining any of it.  Were there comments from Xi or Li Qiang?  If so, I have not seen them.  While Chinese assets have underperformed lately, that seems to have been a response to the Trump announcements of even more tariff-minded economic cabinet members.  And the currency is essentially unchanged this morning, hanging just above that 7.25 level vs. the dollar which has served as a cap for the past decade.  (see below).

Source: tradingeconomics.com

Keep in mind that the consensus view is if Trump imposes tariffs, the renminbi will weaken enough to offset them very quickly.  Arguably, the dollar’s strength since September, when it briefly traded below 7.00, is a response to first, Trump’s improving prospects to win, and then once he won, his cabinet selections.  Will CNY really decline 5% if tariffs are imposed?  That seems an awful lot, but I guess it’s possible.  It strikes me that hedgers should be looking at CNY puts to manage their risk here.

Finally, a look at Europe shows that the dysfunction on the continent seems to be accelerating.  France is the latest target as the current government is hanging on by a thread with growing expectations that Marine Le Pen’s RN party is going to call for a confidence vote and topple it.  As well, there are growing calls for President Macron to resign as he has clearly lost control.  They are currently running a 6% fiscal deficit (just like the US although without the benefit of the world’s reserve currency) and they already have the highest tax burden in Europe.    With Germany sinking further into its own morass (GfK Consumer Confidence fell to -23.3 and continues to show a nation lacking belief in its future.  Just look at the longer-term chart of this indicator below:

Source: tradingeconomics.com

While Covid was obviously a problem, things seemed to be getting back toward normal until Russia’s invasion of Ukraine in early 2022 sent energy prices higher and laid bare the insanity of their Energiewende policy.  As industry flees the country and politics focuses on the immigration issues ignited by Angela Merkel’s open borders policy, people there truly have little hope that things will get better.  

I cannot look at the situation in both Germany and France, with both nations struggling mightily and conclude anything other than the ECB is going to be cutting rates more aggressively going forward.  Combining that with the ongoing belief that Trump’s policies are going to be dollar positive overall, it seems that the euro has much further to decline.  Do not be surprised to see it break parity sometime early in 2025.

Ok, ahead of the Thanksgiving holiday, let’s look at other markets.  In addition to the gains in Chinese shares, Australia (+0.6%) and New Zealand (+0.7%) had a good session with the latter buoyed by the RBNZ cutting rates the expected 50bps.  However, Japan (-0.8%) was under pressure as the yen (+1.1%) rallied strongly on rumors that the BOJ is getting set to hike rates next month, a bit of a change from the previous viewpoint.  In Europe, the CAC (-1.25%) is the laggard as investors are watching French OATs slide in price (rise in yields) relative to their German Bund counterparts and worrying that if the government does fall, there is no way for things to work without the RN involved.  But the DAX (-0.6%) is also softer as is the rest of the continent.  Only the UK (0.0%) is holding up this morning.   meanwhile, at this hour (7:10), US futures are pointing slightly lower, just -0.15% or so.

In the bond market, Treasury yields (-4bps) continue to slide as investors are going all-in on the idea that proposed Treasury Secretary Bessent will be able to solve the intractable problems current Secretary Yellen is leaving him.  This decline is helping European sovereign yields slide as well, as they decline between -1bp and -3bps.  However, a quick look at the chart below shows the above-mentioned Bund-OAT story and how that spread is the widest it has been in many years.

Source: tradingeconomics.com

In the commodity space, oil (+0.2%) is settling in just below $70/bbl as it becomes clear that OPEC+ is not going to be raising production anytime soon.  NatGas (-4.8%) has suffered this morning on warmer weather in Europe, but the situation there remains dicey at best, and I think this has further to run.  In metals markets, gold (+0.8%) is continuing to rebound from Monday’s wipeout, having recouped about half of the move, and we are also seeing strength in silver and copper on the China stimulus story.

Finally, the dollar is under pressure again this morning with the yen and NZD (+1.1%) leading the way although the euro (+0.3%) and pound (+0.3%) are having solid sessions as well.  In the EMG bloc, MXN (-0.3%) continues to be pressured by the tariff talk although much of the rest of the bloc is following the euro’s lead and edging higher.  My sense here is that there are quite a few crosscurrents pushing the dollar around so on any given day, it is hard to tell what will happen.  However, I still am looking for eventual further dollar strength, especially given the Fed seems to be far less likely to cut aggressively.

On the data front, yesterday’s new Home Sales were horrific, falling -17.3% and indicating the housing market is beginning to struggle.  I think that is one of the reasons the rate cut probability rose.  As to the rest of today’s data beyond PCE we see the following: 

Personal Income0.3%
Personal Spending0.3%
Q2 GDP2.8%
Durable Goods0.5%
-ex Transport0.2%
Initial Claims216K
Continuing Claims1910K
Goods Trade Balance-$99.9B
Chicago PMI44.0

Source: tradingeconomics.com

With the holiday, there are no Fed speakers scheduled and Friday, exchanges are only open for a half-day.  There continues to be a very positive vibe overall, with retail investors the most bullish they have ever been according to several banking surveys.  As well, there continues to be a positive vibe from the Trump cabinet picks which has many people expecting great things.  As I said yesterday, I hope they are correct.

My concerns go back to the fact that I just don’t see inflation declining like the Fed projects and that is going to have some negative market impacts along the way.  The one inflation positive is that I see oil prices with the opportunity to fall further, although demand for NatGas should keep that market underpinned.  As to the dollar, I’m still looking for a reason to sell it and none has been presented.

There will be no poetry on Friday so please have a wonderful Thanksgiving holiday and we get to see how things play out come Monday.

Good luck and good weekend

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Not in a Hurry

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Said Jay, we are not in a hurry
To cut, as the future is blurry
As well, since it’s Trump
We don’t want a slump
‘Cause really, his favor, we curry

 

Apparently, the Chairman is reading FX Poetry (🤣) these days as he has come to the same conclusions I have drawn, there is no reason to cut rates anytime soon.  Yesterday, in a moderated discussion in Dallas, the Chairman said, “The economy is not sending any signals that we need to be in a hurry to lower rates. The strength we are currently seeing in the economy gives us the ability to approach our decisions carefully.”  And let’s face it, yesterday’s data simply added to the picture where the employment situation is not in trouble (Initial Claims rose only 217K, less than expected) while inflation signals remain hotter than desired with both core CPI and core PPI looking like they have bottomed as per the chart below.

Source: tradingeconomics.com

One of the things that Fed speakers consistently discuss is whether or not current policy is accommodative or restrictive based on their view of where the neutral rate of interest lies.  The problem, of course, is that neutral rate, also known as R* (R-star) is unknown and unknowable, only able to be determined in hindsight.  But that doesn’t stop them from trying.

At any rate, a consistent theme we have heard recently from Fed speakers is that they believe their policy is restrictive, hence the need to lower interest rates at all.  But there is a case to be made that policy is not restrictive at all right now as evidenced by the fact that the 10-year Treasury rate is actually below the “true” risk free rate.  How is that possible you may ask.

Consider that 30-year mortgage rates are also generally considered risk-free as not only are they collateralized, but they are mostly guaranteed by FNMA, GNMA and FHLMC, quasi government agencies that were shown to have the full faith and credit of the US government behind them when things got tough during the GFC.  Historically, meaning prior to Covid, the spread between 30-year mortgage rates and 10-year Treasuries was about 165bps on average.  However, since February of 2020, that average spread has expanded to 230bps.  (Notice how the green line representing the difference between the two rates is stably higher since Covid in 2020.)

Source: data FRED database, calculations @fx_poet

That difference is important because if you consider the idea that mortgage rates represent a better estimate of the “true” risk-free rate, then Treasury yields are cheap by 65bps relative to where they would otherwise be.  In other words, policy is looser by that amount than the Fed believes.  Why would this be the case?  Well, QE has very obviously distorted the price signals from the bond market.  Now, I grant that the Fed has also distorted the mortgage market (recall, they still own $2.26 trillion of those), but despite the ongoing QT process, they own $4.3 trillion of Treasuries.  And if price signals are distorted, making policy becomes that much tougher for the Fed.  It seems quite possible that through their own actions they have lost sight of reality and therefore, continue to make policy based on inaccurate data.  I would offer that as an explanation as to why the Fed always seems out of touch…because they are looking at the wrong things.

Ok, let’s take a look elsewhere in the non-political world to see what is going on.  Last night, China released their monthly data on Retail Sales (4.8% Y/Y), IP (5.3% Y/Y), Unemployment (5.0%) and Fixed Asset Investment (3.4% Y/Y).  Some parts were good (Unemployment was a tick lower than last month and expected, Retail Sales was a full point higher than expected) and some not so good (IP was 0.3% lower than forecast and Fixed Asset Investment came in 1 tick lower.). As well, the House Price Index there fell -5.9% Y/Y last month, which as you can see in the chart below, is indicative of the fact that the property problems in China are still significant and seemingly getting worse.

Source: tradingeconomics.com

However, one thing China is doing is pumping up its exports ahead of the inauguration of Donald Trump as they are clearly very concerned over the widely mooted 60% tariffs to be imposed on Chinese exports to the US.  In October, exports exploded higher by 12.7% and I expect we will see that again in November and December as companies there do all they can to beat the clock.  One thing this will do is help goose GDP data in China so that 5.0% growth target seems much more attainable now.  How things play out going forward remains to be seen, but for now, China is going to push as hard as possible.

Alas for the Chinese, that data and this idea did nothing to help the stock market there where the CSI 300 fell -1.75% last night, the laggard in the Asian time zone.  Given equities are discounting instruments, it appears people are more concerned over the future than the past.  Elsewhere in Asia, markets were generally flat to modestly firmer (Nikkei +0.3%) after (despite?) the US equity declines yesterday.  In Europe this morning, most markets are little changed to slightly softer  although Spain’s IBEX (+0.9%) is bucking the trend with its financial sector performing well, perhaps on the idea that the two big Spanish banks, Santander and BBVA, will benefit from the Fed’s seeming policy shift.  However, US futures are softer at this hour (7:15) lower by between -0.3% and -0.6%.

In the bond market, yields around the world are virtually unchanged this morning with 10yr Treasuries at 4.43% and no movement in either Europe or Japan.  This feels to me like investors are not sure which way to go.  Perhaps more are beginning to understand my type of explanation above regarding where things are now and are unsure how to play the future regarding inflation prospects, especially with potentially large changes coming under a new administration.  My take is yields will continue to drift higher alongside rising inflation, but that is not a universal view at all.

In the commodity space, oil (-0.4%) is a touch softer this morning although the big declines seemed to have stopped for now.  Here, too, uncertainty about how policy will evolve going forward has traders on the sidelines. In the metals markets, yesterday’s lows seem to be holding for now as while gold is unchanged on the session, both silver (+0.85%) and copper (+1.75%) seem to be rebounding.  If yields are going to continue higher, the road for metals is likely to be tough, but ultimately, lack of supply is going to drive this story.

Finally, the dollar is giving back some of its gains from this week in what appears to be a profit taking move.  It can be no surprise this is the case, especially given holding positions over the weekend at the current time remains a fraught exercise.  After all, will there be an escalation in Israel/Lebanon?  Ukraine?  Somewhere else?  And what will Trump announce over the weekend?  There has still been no announcement regarding his Treasury Secretary, and that is obviously crucial.  So, the dollar has given back about 0.3% of this week’s move largely across the board and I wouldn’t give it any more thought than that.

On the data front, this morning brings the Empire State Manufacturing Index (exp -0.7) as well as Retail Sales (0.3%, 0.3% ex autos) at 8:30.  Then, at 9:15 we see IP (-0.3%) and Capacity Utilization (77.2%).  There are no other Fed speakers scheduled today, although after Powell pushed back on further rate cuts yesterday, it will be interesting to hear the next ones and how they describe things.  If today’s data is hot, I would expect the probability of a rate cut in December, which currently sits at 62.4%, to fall below 50%.  As I have maintained, there just doesn’t seem to be much of a case to keep cutting given the economy’s overall strength.

With that in mind and given that growth elsewhere in the world is lagging, I still like the dollar to maintain and gain strength going forward.

Good luck and good weekend

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Right On Humming

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So, CPI didn’t decline
And may not be quite so benign
As Jay and the Fed
Consistently said
When hinting more rate cuts are fine
 
However, that will not deter
Chair Powell, next month, to confer
Another rate cut
Though it is somewhat
Unclear if his colleagues concur

 

Despite the fact the narrative is pushing Unemployment as the primary focus of the FOMC, yesterday’s CPI report, which seemingly refuses to decline to the Fed’s preferred levels, had Fed speakers beginning to hedge their bets regarding just how quickly rates would be coming down from here. [Emphasis added.]

St. Louis Fed President Alberto Musalem explained, “The strength of the economy is likely to provide the space for there to be a gradual easing of policy with little urgency to try and find where the neutral rate may be.”

Dallas Fed President Lorrie Logan commented (using a series of maritime metaphors for some reason) “After a voyage through rough waters, we’re in sight of the shore: the FOMC’s Congressionally mandated goals of maximum employment and stable prices, but we haven’t tied up yet, and risks remain that could push us back out to sea or slam the economy into the dock too hard.”  

Finally, Kansas City Fed President Jeff Schmid told us, “While now is the time to begin dialing back the restrictiveness of monetary policy, it remains to be seen how much further interest rates will decline or where they might eventually settle.”  

If we ignore the oddity of the maritime metaphor, my takeaway is that the Fed is still looking to cut rates further as directed by Chairman Powell, but the speed with which they will act seems to be slowing down.  As I have maintained in the past, given the current data readings, it still doesn’t make that much sense to me that they are cutting rates at all, but arguably, that’s just another reason I am not a member of the FOMC.  Certainly, the market is on board as futures pricing increased the probability of that cut from 62% before the release to 82% this morning.  There is still a long way to go before the next meeting, with another NFP, PCE and CPI report each to be released, as well as updates on GDP and Retail Sales and all the monthly figures, so this story is subject to change.  But for now, a rate cut seems likely.

One other thing, I couldn’t help but notice a headline that may pour a little sand into the gears of the rate cutting apparatus at the Eccles Building.  This is on Bloomberg this morning: Manhattan Apartment Rents Rise to Highest Level Since July.  Again, the desperation to cut rates seems misplaced.

Despite the fact rate cuts are coming
The dollar just keeps right on humming
This morning it’s rising
Which ain’t that surprising
As more depths, the euro is plumbing

Turning our attention to the continent, European GDP figures were released this morning, and they remain disheartening, to say the least.  While the quarterly number rose to 0.4%, as you can see from the chart below, it has been several years since the continent showed any real growth, and that was really just the rebound from the Covid lockdowns.  Prior to Covid, growth was still lackluster.

Source: tradingeconomics.com

While these are the quarterly numbers, when looking at the Y/Y results, real GDP grew less than 1% in Q3 for the past 6 quarters and, in truth, shows little sign of improving.  After all, virtually every nation in the Eurozone is keen to continue their economic suicide via energy policy and regulation.  This thread on X (formerly Twitter)is a worthwhile read to get an understanding of the situation on the continent.  I show it because this morning, the euro has fallen yet further, and is touching the 1.05 level, seemingly on its way to parity and below.  It highlights that since just before the GFC, the Eurozone economy has fallen from virtually the same size as the US economy, to just 60% as large, and explains the key reasons.  Read it and you will be hard-pressed to consider the euro as a safe store of value, at least relative to the dollar.  And remember, the dollar has its own issues, but at least the US economy remains dynamic.

But the dollar is king, again, this morning, rising against virtually all its counterparts on the session.  Versus the G10, the average movement is on the order of 0.3% or so, but it is uniform.  USDJPY is now pushing 156.00, the pound seems headed for 1.2600 and Aussie is below 0.65.  My point is concerns about the dollar and its status in the world seem misplaced in the current environment.  If we look at the EMG bloc, the dollar is stronger nearly across the board as well, with similar gains as the G10.  MXN (-0.5%), ZAR (-0.4%) and CNY (-0.2%) describe the situation which has been a steady climb of the greenback since at least the Fed rate cut, and for many of these currencies, for the past 6 months.  Nothing about President-elect Trump’s expected policies seems likely to change this status for now.

If we look at equity markets, yesterday’s US outcomes were essentially little changed on the day.  However, when Asia opened, with the dollar soaring, we saw a lot more weakness than strength, notably in China with the CSI 300 (-1.7%) and Hang Seng (-2.0%) leading the way lower although the Nikkei (-0.5%) also lagged along with most other Asian markets.  While there were some modest gainers (Australia +0.4%, Singapore +0.5%) red was the predominant color on screens.  In Europe, however, investors are scooping up shares with the DAX (+1.2%) leading the way although all the major bourses are higher on the session.  It seems that there is a growing consensus that the ECB is going to cut 25bps in December and then another 25bps in January, which has some folks excited.  US futures, meanwhile, are slightly firmer at this hour (7:00).

All this is happening against a backdrop of a continued climb in yields around the world.  Yesterday, again, yields rose with 10yr Treasuries trading as high as 4.48%, their highest level since May, and that helped drag most European yields higher as well.  This morning, we are seeing some consolidation with Treasury yields backing off 1bp and European sovereign yields lower by -2bps across the board.  The one place not following is Japan, where JGB yields edged higher by 1bp and now sit at 1.05%.    Consider, though, that despite those rising yields, the yen continues to slide.  In fact, that is the correlation that exists, weaker JPY alongside higher JGB yields as you can see in the below chart.

Source: tradingeconomics.com

While it is open to question which leads and which follows, my money is on Japanese investors searching for higher yields, selling JGB’s and buying dollars to buy Treasuries.

Finally, the commodity space continues to get blitzed, or at least the metals markets continue that way as once again both precious and industrial metals are all lower this morning.  In fact, in the past week, gold (-5.7%), silver (-6.4%) and copper (-9.1%) have all retraced a substantial portion of their YTD gains.  It is unclear to me whether this is a lot of latecomers to the trade getting stopped out or a fundamental change in thinking.  My view is it is the former, as if the Trump administration is able to support growth, I expect that will reveal the potential shortages that exist in the metals space.  Oil (+0.4%) is a different story as it continues to consolidate, but here I think the odds are we see lower prices going forward as more US drilling brings supply onto the market.

On the data front, this morning brings the weekly Initial (exp 223K) and Continuing (1880K) Claims data along with PPI (0.2%, 2.3% Y/Y) and core PPI (0.3%, 3.0% Y/Y).  In addition, the weekly EIA oil data is released with modest inventory builds expected and then we hear from Chair Powell at 3:00pm this afternoon.  Arguably, that is the event of the day as all await to see if the trajectory of rate cuts is going to flatten out or not.

I cannot look at the data and conclude that the Fed will be very aggressive cutting rates going forward.  The futures market is now pricing in about 75bps of cuts, total, by the end of 2025.  That is a 50bp reduction in that view during the past month and one of the reasons the dollar remains strong.  I would not be surprised if there are even fewer cuts.  Right now, everything points to the dollar continuing to outperform virtually every other currency.

Good luck

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A Warning

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Though Trump has been leading the news
With folks asking who he will choose
As agency chiefs
That share his beliefs
For markets, today brings new cues
 
Inflation will soon be released
And though Jay claims he killed this beast
The data this morning
May well be a warning
Inflation, in fact, has not ceased

 

Source: tradingeconomics.com

Beauty (and everything else) is in the eye of the beholder.  So, what are we to make of the above chart which shows the past ten years’ worth of monthly Core CPI readings prior to this morning’s release.  Some eyes will travel to the peak in April 2021 (0.812%) and see a downward sloping line from there.  The implication is that the trend is your friend and that things are going well.  Others will gravitate to the June 2023 print (0.195%) and see that except for a blip lower in June 2024 (0.1%), the series looks like it may have bottomed and, if anything, has found a new home.

Remember, that if the monthly print is 0.3%, that annualizes to 3.7% Core CPI.  That seems pretty far above the 2.0% target that the Fed is shooting for and would call into question exactly why they are cutting interest rates.  In fact, you can look at the above chart and see that prior to the pandemic, core CPI on a monthly basis was below 0.3% every month except one, with many clearly down near the 0.1% level.

As much as Powell and his minions want to convince us that inflation is heading back to their goal and everything is ok, the evidence does not yet seem to be pointing in that direction.  For today, current median analyst expectations are for a headline of 0.2% M/M, 2.6% Y/Y and a core of 0.3% M/M, 3.3% Y/Y.  Even if the data comes as expected, it would seem very difficult to justify continuing to cut rates given the equity market remains essentially at all-time highs, while Treasury yields (-1bp today, +12bps yesterday) seem like they are starting to price in higher long-term inflation.

However, something interesting seems to be happening with the Fed speakers.  Richmond Fed President Barkin yesterday explained that things look pretty good, but declined to even consider forecasting where things will go.  As well, Minneapolis Fed President Kashkari indicated that while inflation has declined, it does not yet seem dead.  The Fed funds futures market is now pricing just a 62% probability of a rate cut in December.  One month ago, it was pricing an 84% probability.  As I have maintained, it seems increasingly difficult for the Fed to make the case that rate cuts are necessary given the economic data that we continue to see.  I understand that there are still a large group of pundits who believe things are much worse when you dig under the surface of the data, and I also understand that most people in the country don’t believe that things are going that well, hence the landslide election results for Mr Trump.  However, based on the data that the Fed allegedly follows, rate cuts seem difficult to support.  Today will be another piece of the puzzle.  If the data is hot, I expect risk assets to suffer more and the dollar to continue its rally.  If the data is soft, look for new records in stocks while the dollar retraces some of its recent gains.

With that in mind, let’s look at what happened overnight in markets.  Yesterday’s modest declines in the US market were followed by more selling than buying in Asia with the Nikkei (-1.7%) leading the way lower but weakness also seen in Australia (-0.75%), Korea (-2.65%), India (-1.25%) and Taiwan (-0.5%) as an indication of the general sense in the time zone.  The outlier here was mainland China (+0.6%) where hope remains eternal that the government will fire their bazooka.  In Europe, though, this morning is seeing a hint of red with most major indices lower by just -0.1% and Spain’s IBEX (+0.2%) even managing a small gain.  The commentary from the continent is over fears of how things will evolve with the new Trump administration and his threat of more tariffs on European exports.

But here’s something to consider.  If Trump is successful in quickly negotiating an end to the Russia/Ukraine war, won’t that be a huge benefit to Europe?  After all, if the war is over, they will be able to restart imports of cheap Russian NatGas which should have an immediate impact on their overall cost of energy, especially Germany, and help the economies there substantially.  I know they love to scream because they all hate Trump, but it seems like he could help them a lot if they would let him.  Oh yeah, US futures are a touch lower, -0.2%, at this hour (7:10).

Anyway, in the bond market, after yesterday’s rout in the US, yields are little changed this morning but in Europe, yields are climbing as they weren’t able to keep up with US yields yesterday.  So, on the continent, yields are higher between 2bps and 4bps after rising 4bps – 6bps yesterday.  In Asia, JGB yields jumped 4bps on the global rise in bond yields and are now back above 1.0%.  However, that has not been nearly enough to help the yen (-0.2%), which continues to weaken and is pushing back above 155.00 this morning.  

In the commodity markets, oil (+0.2%) is edging higher, but that seems to be consolidation after what has been a pretty awful week for the black sticky stuff.  OPEC reduced its demand forecasts for the 4th consecutive month, something else that is weighing on the price and, of course, the Trump administration is going to seek to make it much easier to explore for and produce more oil.  In the metals markets, gold (+0.5%) seems to have found a temporary bottom along with silver (+0.8%) although the damage has been substantial this week.  However, copper and aluminum remain under pressure as fears over continued weakness in China seem to be weighing on the price.

Finally, the dollar has stopped rising sharply, although it is not really declining very much, at least not vs. the G10 currencies.  In fact, vs. the G10, the dollar is softer by just 0.1% or so vs. the entire bloc other than the yen mentioned above.  However, vs. the EMG bloc, the dollar has ceded some more gains with KRW (+0.7%) the leader but MXN (+0.4%), CNY (+0.35%) and ZAR (+0.6%) all bouncing back after a week of substantial declines.  We all know nothing goes up or down in a straight line, so this consolidation is just that, it is not a trend change by any stretch.  A quick look at the MXN chart below, which is essentially what we have seen everywhere, explains just how insignificant the overnight movement has been relative to the recent trend.

Source: tradingeconomics.com

On the data front, aside from the CPI data, we hear from three more Fed speakers (Logan, Musalem and Schmid) so it will be interesting to see if they are starting to change their sense of how things are going to progress.  Of course, all eyes will be on Powell’s speech Thursday afternoon, but perhaps there are some clues to be had here.

It is not clear to me that anything has changed in the big picture.  The US economy continues to be the strongest one around and now has the added impetus of expectations for more positivity with the change in the administration.  In that environment, my long-term view on the dollar remains it has further to run.

Good luck

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Lickspittle

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The Fed has a banker named Jay
Who last week was quick to betray
His fervent belief
He can’t come to grief
If Trump wants to force him away
 
This morning his Journal lickspittle
Wrote glowingly ‘bout Jay’s committal
To stand strong and firm
And finish his term
No matter how much he’s belittled

 

First, on this Veteran’s Day holiday, let us all pause a minute and remember those veterans who gave their lives for our nation.

The reverberations of Donald Trump’s re-election last week continue to be felt around the world with comments from virtually every walk of life explaining their joy/distress at the outcome and trying to prognosticate what will play out in the future.  I will tell you that I have no idea how things will evolve, although I am hopeful that his administration will be able to reduce the size of the federal government as that can only be a benefit.

But one of the things that we learn about people during times of change, especially people who believe they are crucially important to the world, is just how much they believe they are crucially important to the world.  Nothing highlights this quite like the lead article in this morning’s WSJ titled, If Trump Tries to Fire Powell, Fed Chair Is Ready for a Legal Fight.  This is not to say that Powell doesn’t have an important role, he certainly does.  But this pre-emption of the entire question is a testimony of just how important he thinks he is.  

My one observation on this is that despite all the discussion that the Fed isn’t political, it is clearly a very political institution.  Nothing highlights that better than this Tweet from Joseph Wang (aka @FedGuy12), a commentator who spent a dozen years at the Fed and understands its inner workings quite well.  Under the rubric that a picture is worth 1000 words, take a look at Federal Reserve political contributions below and then ask yourself if the Fed is not only political, but partisan.  

Source: X @FedGuy12

It is important to recognize this as it also may help explain why the Fed is cutting interest rates despite GDP (currently 2.8%) and Core PCE (currently 2.7%) running far above their long-term expectations and Unemployment (currently 4.1%) running below their long-term expectations as per the below SEP from the September FOMC meeting.  If anything, I might argue they should be raising interest rates!

Source: fedreserve.gov

At any rate, the ramifications of this election outcome are likely to drive the market narrative for a while yet.

But overnight, there just wasn’t that much of interest, at least not that much new.  So, let’s take a look at overnight market activity.  After Friday’s latest record high closes in the US, the picture in Asia was less robust with Japanese equities basically unchanged on the day after Shigeru Ishiba was elected PM to run a minority government, while Hong Kong (-1.5%) and mainland Chinese (+0.7%) shares went in opposite directions.  Chinese financing data was released that was mildly disappointing, but there are several stories about how the government is going to reacquire land that is currently in private hands but not being used and repurpose it for benefit.  The rest of the region had many more laggards than gainers, perhaps on concerns that Trump will be imposing tariffs throughout the region.  As to Europe, despite all the pearl clutching by the leadership there, equity investors are excited with gains seen across the board (DAX +1.3%, CAC +1.2%, FTSE 100 +0.8%).  US futures at this hour (7:30) are continuing their ride higher, up 0.4%.

In the bond market, Treasuries aren’t really trading today with banks closed.  In Europe, sovereign yields have edged down between 1bp and 2bps, perhaps feeling a little of that equity euphoria, as there was precious little in the way of news or commentary to drive things.

In the commodity space, oil (-1.7%) is under further pressure as broadly slower global growth undermines demand while prospects of the Trump administration fostering significant additional drilling opportunities helps build the supply side.  However, NatGas (+7.0%) is soaring this morning as Europe, notably Germany, is suffering from dunkelflaute (maybe the best word I have ever heard) which means ‘a period of low wind and solar power generation because it is cloudy, foggy and still’, and so they need to buy a lot more NatGas to power the economy.  In fact, NatGas is higher by nearly 15% in the past month although remains substantially cheaper in the US than in Europe and Asia.  My take is this discrepancy cannot last forever.  As to the metals markets, they are under pressure again this morning with both precious (Au -0.9%, Ag -0.3%) and industrial (Cu -0.5%, Al-1.4%) feeling the pain.  

A key driver in the metals space is the dollar, which is rallying against all its counterparts this morning quite robustly.  The euro (-0.6%) is back to levels last briefly touched in April, but where it spent more time a year ago, as it seems to be heading to 1.05 and below.  Meanwhile, JPY (-0.8%) is also feeling the heat while NOK (-0.7%) is pressured by both the dollar’s general strength and the oil weakness.  In the EMG bloc, MXN (-1.3%) is having a rough go as the tariff talk heats up, but we have also seen weakness in EEMEA with ZAR (-1.4%), PLN (-1.0%) and HUF (-1.2%) all under pressure this morning.  Not to be outdone, Asian currencies, too, are selling off with CNY (-0.3%) back above 7.20 for the first time since August while THB (-0.9%), MYR (-0.7%) and SGD (-0.6%) demonstrate the breadth of the move.

With the holiday, there is no data to be released today, but this week brings CPI amongst other things.

TuesdayNFIB Small Biz Optimism91.9
WednesdayCPI0.2% (2.6% Y/Y)
 Ex food & energy0.3% (3.3% Y/Y)
ThursdayPPI0.2% (2.3% Y/Y)
 Ex food & energy0.3% (2.9% Y/Y)
 Initial Claims224K
 Continuing Claims1895K
FridayRetail Sales0.3%
 -ex autos0.3%
 Empire State Mfg-1.4
 IP-0.3%
 Capacity Utilization77.2%

Source: tradingeconomics.com

In addition to this data, we hear from 11 different Fed speakers this week, including Chairman Powell again at 3:00pm on Thursday afternoon.  It is difficult to believe that the message from last week is going to change, but you never know.  However, I expect that every one of them is going to be explaining that things are good, but they are cutting rates to ensure things remain that way as they consistently congratulate themselves on having slain inflation.  I hope they are right…I fear they are not.

For now, though, the US economy remains the strongest in the world (7% budget deficits will help prop up growth after all) and capital continues to flow in this direction.  I see no reason for the dollar to fall anytime soon.  Whatever problems lie ahead, I believe they are over the metaphorical horizon and other than a few doomporn purveyors, not in the market’s view.

Good luck

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