Under Real Threat

Posted on September 2, 2025 by fxpoet

The PCE data was warm
And still well above Powell’s norm
The problem for Jay
Despite what folks say
Is tariffs ain’t causing the storm

Instead, service prices keep rising
With wages not yet stabilizing
And so, long-date debt
Is under real threat
As traders, those bonds, are despising

Under the rubric, economic synchronization remains MIA, I think it is worth looking at the performance of 30-year bond yields across all major nations as per the below chart. While the actual rates may be different, the inescapable conclusion is that yields across the board continue to rise to their highest levels in more than five years and the trend remains strongly in that direction. Regardless of central bank actions, or perhaps more accurately because of their attempts to keep rates low, it is increasingly clear that confidence in government debt, the erstwhile safest assets around, continues to slide.

Arguably, this is a direct response to the fact that despite their vaunted independence, central banks around the world have very clearly abandoned their inflation targets and are now doing all they can to support their respective economies with relatively easy money. Friday’s PCE data is merely the latest in a long line of data points showing that although most of these banks are allegedly targeting 2.0% Y/Y inflation, the outcomes have been higher than target, yet excuses to cut rates are rife. If you are wondering why gold continues to rally, look no further than this.

Source: tradingeconomics.com

In fact, this morning’s Eurozone CPI reading of 2.1%, 2.3% core, is merely another chink in the armor as it was a tick higher than expected. One of the problems, I believe, is that there remains a very strong belief that the key driver of inflation is economic growth, not money supply growth, despite all evidence to the contrary. But it is a Keynesian fundamental belief, and every central bank around the world is convinced that slowing economic activity will result in declining inflation rates. Alas, as long as central banks continue to support their domestic government bond markets, inflation will remain.

This is where the synchronicity, or lack thereof, of the economy is having its biggest impact. The fact that certain parts of the economy, notably AI investment, continues to run at record pace and continues to support excess demand for certain things offsets weakness in other parts of the economy, for instance, commercial property, which is looking at a significant deterioration in its finances. A look (see chart below) at Commercial Mortgage-Backed Securities (CMBS) for office buildings shows that the delinquency rate has reached an all-time high, higher even than the GFC, as the changes in the US working population and the increase in work-from-home have devastated the value of many office buildings.

Perhaps more interesting is the fact that multifamily CMBS (financing for apartment buildings) is also suffering despite a housing shortage and rising rents. While delinquency rates have not reached GFC levels, as you can see, they are rising rapidly as well.

So, which is it? Are yields rising because growth is driving inflation higher (the Keynesian view of the world)? How does that accord with rising delinquencies if growth is the driver? In the end, there is no single, simple answer to explain the dynamics of an extraordinarily complex system like the economy. I do not envy policymakers’ current situation as there are no correct answers, merely tradeoffs (just like all economics). But it is increasingly clear that investors are losing their interest in holding onto government debt as they seemingly lose faith in governments’ ability to manage their respective finances. Which brings us to one more chart, the barbarous relic (which for those of you who don’t know, was Keynes’ term of derision for gold). I thought it might be instructive to see how gold and 30-year Treasury yields seem to have the same trajectory as the shiny metal regains its all-time highs this morning.

Source: tradingeconomics.com

With that cheery thought after a beautiful Labor Day weekend, let’s see how markets are behaving now that September is upon us. Friday’s selloff in the US (a disappointing way to end the month) was followed by a mixed session in Asia with the Nikkei (+0.3%) managing to rally although China (-0.75%) and Hong Kong (-0.5%) followed the US lower despite a slightly better than expected RatingDog (formerly Caixin) PMI of 50.5 released Sunday night. Elsewhere in the region, Korea (+0.95%) was the big winner with modest losses almost everywhere else in the region. As to Europe, the DAX (-1.25%) is the worst performer, although Spain’s IBEX (-0.95%) is giving it a run for its money as the higher Eurozone inflation squashed hopes that the ECB may cut rates again soon. Interestingly, French shares are unchanged this morning, significantly outperforming the rest of the continent despite continued concerns over the status of the French government which seems likely to collapse next week after the confidence vote on Monday. Perhaps the idea that the government will not be able to do anything is seen as a benefit! As to US futures, negative is the vibe this morning, with all the major indices pointing lower by at least -0.6%.

In the bond market, based on my commentary above, you won’t be surprised that Treasury yields are higher by 6bps this morning and European sovereign yields are all higher by between 4bps and 6bps. The big story here is that French yields are rising to Italian levels as the former’s finances are crumbling while Italy has stabilized things for the time being. Of course, all this pales compared to UK yields (+4bps) where 30-year yields have climbed to their highest level since 1998 and the 10-year yields are now nearly 200 basis points higher than during the ‘Liz Truss’ moment of 2022 as per the below. It is not clear to me if the UK or France will collapse first, but I suspect that both may be begging at the IMF soon!

Source: tradingeconomics.com

Oil prices (+1.8%) continue to rise as Russia and Ukraine intensify their fighting with Ukraine attacking Russian refining capacity, apparently shutting down up to 17% of their output. However, while we have seen oil rebound over the past several weeks, the longer-term trend remains lower.

Source: tradingeconomics.com

As to metals, this morning gold (+0.2%) continues to set new highs while silver (-0.4%) is backing off of its recent multi-year highs, although remains well above $40/oz. Precious metals are in demand and likely to stay that way for a long time to come in my view.

Finally, the dollar is much firmer this morning with the pound (-1.25%) the laggard across both G10 and EMG currencies as investors flee from the ongoing policy insanity there (between the zeal with which they are trying to reduce CO2 and the crackdown on free speech, it seems the government is trying to alienate the entire native population.). But the euro (-0.7%), Aussie (-0.7%), yen (-1.0%) and SEK (-0.75%) are all under pressure in the G10 bloc. The UK is merely the worst of the lot. As to the EMG bloc, MXN (-0.7%), ZAR (-0.7%) and PLN (-0.9%) are also sharply lower although Asian currencies (KRW -0.2%, INR -0.2%, CNY -0.15%) are faring a bit better overall.

On the data front this week, we have a bunch culminating in payrolls on Friday.

Today	ISM Manufacturing	49.0
	ISM Prices Paid	65.3
Wednesday	JOLTS Job Openings	7.4M
	Factory Orders	-1.4%
	Fed’s Beige Book
Thursday	Initial Claims	230K
	Continuing Claims	1960K
	Trade Balance	-$75.3B
	Nonfarm Productivity	2.7%
	Unit Labor Costs	1.2%
	ISM Services	51.0
Friday	Nonfarm Payrolls	75K
	Private Payrolls	75K
	Manufacturing Payrolls	-5K
	Unemployment Rate	4.3%
	Average Hourly Earnings	0.3% (3.7% Y/Y)
	Average Weekly Hours	34.3
	Participation Rate	62.1%

Source: tradingeconomics.com

In addition, we hear from four Fed speakers with NY Fed president Williams likely the most impactful. The current probability for a Fed funds cut according to CME futures is 92%. A weak print on Friday will juice that and get people talking about 50bps to start. A strong number will stop that talk in its tracks. But until then, it is difficult to look at the messes everywhere else in the world and feel like you would rather own other currencies than the dollar (maybe the CHF).

Good luck

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Stroke of a Pen

Posted on August 1, 2025 by fxpoet

While NFP’s top of the list
For traders this morning, the gist
Of recent releases
Show more price increases
A trend that cannot be dismissed

As well, Tariff Man, once again
Imposed more by stroke of a pen
While stocks are declining
The dollar’s inclining
To rise vs. the euro and yen

Let’s get the upcoming data out of the way first as the Employment report is due to be released at 8:30. Current median expectations are as follows:

Nonfarm Payrolls	110K
Private Payrolls	100K
Manufacturing Payrolls	-3K
Unemployment Rate	4.2%
Average Hourly Earnings	0.3% (3.8% Y/Y)
Average Weekly Hours	34.2
Participation Rate	62.3%
ISM Manufacturing	49.5
ISM Prices Paid	70.0
Michigan Sentiment	62.0

Source: tradingeconomics.com

This report is obviously of great importance as the Fed continues to rely on a solid labor market as its key justification for not cutting rates. At least that’s its public stance. Recall, too, that last month’s result of 147K was significantly higher than forecast and really backed them up. In fact, I would contend that one of the reasons that Chairman Powell was willing to sound mildly hawkish on Wednesday is because of the labor market’s ongoing performance.

It is interesting to juxtapose this strength with the increasing number of stories about how the increase in investment and usage of AI, especially at tech firms, is driving a significant amount of personnel reductions. And yet, the broad data continue to point to a solid labor economy.

However, I think it is worth taking a closer look at recent inflation focused data as that, too, is going to be a key driving force in the central bank debate worldwide. Yesterday’s PCE data was largely as expected but resulted in a faster pace of inflation on both the headline and core bases. If we consider the trend over the past three years, as per the Core PCE chart below, it appears that the nadir was reached back in June of last year, and while not every print has been higher, I will contend the trend is starting to point upwards.

Source: tradingeconomics.com

Meanwhile, if we turn our attention to European inflation data, while this morning’s Eurozone flash print was unchanged from last month, it was higher than expected. We saw the same trend in individual Eurozone nations yesterday with Germany, Italy and France all showing the recent disinflationary trend stopping, at least for the past month. With these recent releases, the analyst community is of the mind that the ECB is likely to hold rates steady again in September, extending the pause on their previous rate cutting cycle. The strong belief is that US tariffs are going to dampen economic activity and, with that, inflation pressures.

As to the US, with President Trump having announced another wave of tariffs yesterday, as the 90-day window closed, once again the analyst community is calling for inflation to rise here. Ironically, these analysts may be correct that US inflation is going to be slowly heading higher, but whether that is due to tariffs, or perhaps the fact that more than ample liquidity remains in the economy and services prices continue to rise has yet to be determined.

At this point, I think it might be useful to break out an updated version of a chart that has made the rounds before showing price changes since 2000 broken down by categories. Virtually every sector that has seen significant price rises is on the service side of the ledger while most goods saw either deflation or very modest (~1% per annum) inflation.

Housing, which is both a good and a service, and textbooks, which are directly linked to tuition, are the two outliers. Now, many will complain that something like New Cars having risen only 24.7% since 2000 is crazy given their much higher sticker prices, and that is clearly hedonic adjustments doing its job. But if you consider the key expenses in your life, housing, food and health care are generally top of the requirements. It is abundantly clear from this chart that the American angst on prices is well founded. With that in mind, tariffs are exclusively imposed on goods, not services, so given services represent 77.6% of the US economy as of 2022 (as per Grok), the inflationary impact of tariffs seems like it might not be quite as high as the hysteria indicates.

(This is a perfect time to remind you of a great way to manage your inflation risk if you participate in the cryptocurrency markets by buying USDi, the only fully backed inflation tracking coin available. Learn more at www.usdi.com. It is essentially inflation-linked cash.)

Coming back around to the market, I think it is a good time to review one of the other major narrative themes, that the dollar is collapsing as foreigners flee because of the massive debt load, and that the dollar will soon lose its reserve status. You know I have dismissed this idea from the beginning as nothing more than doom porn and an effort by some analysts to get clicks.

There is no doubt that there had been a downtrend in the dollar for the first six months of 2025, and as has been written repeatedly, the decline was the largest during the first half of the year since the 1980’s. As well, my concern over the dollar has been based on the idea that the Fed would indeed be cutting rates despite no need to do so, and that would undermine its yield advantage. But a funny thing happened on the way to the death of the dollar, it stopped falling. While I have been using the DXY chart as my proxy, pretty much every chart looks the same as per the below of both the euro and yen, where the nadir was at the beginning of July and the dollar has risen vs. both somewhere between 3% and 5%.

Source: tradingeconomics.com

In fact, as I look down my board, the dollar has risen against every major currency over the past month, with even tightly controlled CNY declining -0.8%, and the yen falling furthest, down nearly -5.0%. Combine this with the news that Treasury auctions have been well attended with significant foreign interest, and it is hard to conclude the end is nigh for the US economy.

Ok, a really quick turn to markets here as this has gone on longer than I expected. Equities are red everywhere this morning after yesterday’s US declines. Japan (-0.7%), China (-0.5%) after weak PMI data, Hong Kong (-1.1%) and Australia (-0.9%) set the tone for Asia. In Europe, it is even worse with the CAC (-2.2%) and DAX (-1.9%) both under more pressure as a combination of increased worries over trade (although given they ostensibly have a deal, I’m not sure what the issue is) and companies there reporting weaker than forecast results have been the problem. US futures at this hour (7:30) are all pointing lower by about -0.85%.

Despite the fear in stocks, bonds are not seen as the answer this morning with Treasury yields edging higher by 1bp and European sovereign yields all higher by between 3bps and 5bps. I guess the inflation reading has a few traders nervous. Interestingly, if you look at the ECB’s own website showing rate change probabilities, there is a 14% probability of a rate HIKE priced in for the September meeting! JGB yields have also edged higher by 1bp as the BOJ, in their policy briefing yesterday, raised their inflation forecasts for 2026, ostensibly as a precursor to the next rate hike there. I’ll believe it when I see it!

As to commodities, oil (-1.1%) after touching $70/bbl yesterday has rejected the level. While secondary sanctions on Russian oil exports continue to be discussed, they have not yet been implemented. I continue to believe the price ought to be lower, but clearly there is a risk premium for now. In the metals markets, gold (+0.4%) continues to find support despite weakness in other markets (Ag -0.6%, Cu -0.9%) as its millennia-long status as the only true safe haven is reasserting itself. After all, Bitcoin (-0.6%) has not been able to match the relic’s performance of late despite its modern twist.

And that’s really all there is (I guess that’s enough) as we head into the weekend. The market tone will be set by the NFP data, where my take is a strong report will see the dollar rally, bonds suffer, and stocks suffer as well as hopes for a rate cut fade further. Conversely, a weak report should see the opposite impacts.

Good luck and good weekend

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Heartburn

Posted on July 14, 2025 by fxpoet

It seems bond investors are learning
That government spending’s concerning
As yields ‘cross the board
Have all really soared
While buyers become more discerning

Meanwhile, o’er the weekend we learned
That Tariff Man’s truly returned
More letters were sent
Designed to foment
Responses as well as heartburn

As we approach the middle of the summer, two things are becoming increasingly clear; the world today is very different from just a few years ago and it is getting harder and harder to pay for all the things that the world seems to want. Taking the second point first, market headlines today have pointed to German 30-year yields which have traded to their highest level since October 2023, and appear set to breech that point and move to levels not seen since prior to the Eurozone bond crisis in 2011 (see MarketWatch chart below)

Similarly, we have seen 30-year yields rise in Japan, a story that gained legs back in late May, and yields overnight returned to those all-time highs from then.

Source: tradingeconomics.com

Not surprisingly, given the debt dynamics globally, US 30-year yields are also pushing back to the levels seen back in May, although have not quite reached those lofty levels and as I type this morning, are trading just below the 5.00% level.

Source: tradingeconomics.com

As Austin Powers might say, “What does it all mean, Basil?” While I’m just a poet, so take it for what it’s worth, it seems pretty clear that the level of government borrowing is pushing the limits of what private sector investors are willing to absorb. The below chart, created from FRED data tells an interesting tale. Up through the GFC, government and private sector debt grew pretty much in step with each other, although after Black Monday in October 1987, government debt started to grow a bit more rapidly. But the GFC completely changed the conversation and government debt took on a life of its own. Essentially, the GFC took private losses and nationalized them and put them on the government’s balance sheet. (As an aside, this is why there is still so much anger at the fact that nobody was held accountable for that event, with the perpetrators getting larger bonuses after their banks were bailed out.). But in today’s context, the rise in yields is telling us, or me at least, that the market is losing its appetite for more government debt.

While this is the US graph, the situation is similar around the developed world. This is why we are hearing more about Secretary Bessent’s sudden love of stablecoins as they will be a source of significant demand for Treasury paper that he needs to sell. But in the end, do not be surprised if we see more than simply QE, whatever they call it, going forward, but outright financial repression and yield curve control. While the US may be in the vanguard of this situation, the yields in Germany and Japan tell us that the same is happening there as well.

As to the first point above, back in the day, it seemed that weekends were observed by one and all around the world with policy statements a weekday affair. But no longer. Over the weekend, President Trump sent letters to Mexico and the EU that 30% tariffs were on the way if they did not reach an agreement by August 1^st. For 80 years, most of the Western world operated on a genteel basis, with decorum more important than results. It is not clear to me if this was because negotiations were more effective, or because most leaders didn’t have the stomach for confrontation. But it is abundantly clear that President Trump is quite willing to be confrontational with other leaders in order to get his way. The problem for other leaders is they are not used to dealing in this manner and find themselves uncertain as to how to proceed. Thus far, whether they have been combative or conciliatory, it doesn’t seem to matter. Remarkably, it is still just 6 months into this presidency, so things are going to continue to change, but the one thing that is unequivocally true is the world is a different place today than ever before.

Ok, let’s see how other markets are handling the latest tariff storms. Equity markets are mostly unhappy with this new process as after Friday’s modest declines in the US, we saw more losers (Japan, India, Taiwan, Australia) than winners (Hong Kong, China, Korea) in Asia. The salient news there was that the Chinese trade surplus grew to $114.8B, slightly more than expected as exports rose sharply while imports underperformed. However, Chinese bank and lending data did show an increase in M2 and Loan Growth, so at least they are trying to add some monetary stimulus. As to Europe, other than the UK (+0.4%) the continent is under pressure with Germany (-1.0%) the laggard of the bunch. The UK story seems to be a single stock, AstraZeneca, which released strong trial results for a new drug. But otherwise, the tariff story is weighing on the continent. US futures are also softer at this hour (7:30), down around -0.3% across the board.

While my bond conversation was on the 30-year space, 10-year yields are only marginally higher, about 1bp, in the US and Europe although JGB yields did jump 6bps ahead of their Upper House elections this week.

In commodities, oil (+1.2%) continues to find support despite the ongoing theme that the economy is soft and supply is growing significantly with OPEC increasing production and set to return even more to the market by the end of the summer. As it happens, NatGas (+4.75%) is also higher this morning and continues to find substantial support as on a per BTU basis, it is desperately cheap vs. oil, something like one-seventh the price. In the metals markets, while gold (+0.4%) continues to see support, the real action is in silver (+1.4%) which has rallied very consistently, gapping higher as you can see in the chart below, and has been the subject of much discussion as to how far it can rise. Historically, silver lags the timing of gold rallies but far outperforms the gains in percentage terms.

Source: finance.yahoo.com

Finally, the dollar is little changed to a touch stronger this morning as traders cannot decide if tariffs are going to be a problem, or if deals are going to be struck. However, in the dollar’s favor right now is the fact that most other countries are in a clear easing cycle while the Fed remains firmly on hold. Fed funds futures are pricing less than a 7% chance of a cut this month and only a 61% chance of a September cut. If US rates continue to run higher than the rest of the world, and there is limited belief they are going to fall, the dollar will find support. However, given the pressure that President Trump continues to heap on Chairman Powell (there was a story this weekend that Powell is close to resigning, although my take is that is wishful thinking), it is hard to get excited about the dollar’s prospects. Remember this, all the economists who tell us that an independent central bank is critical work for central banks.

On the data front, after virtually nothing last week, we do get some important numbers this week.

Tuesday	CPI	0.3% (2.7% Y/Y)
	-ex food & energy	0.3% (3.0% Y/Y)
	Empire State Manufacturing	-8.0
Wednesday	PPI	0.2% (2.5% Y/Y)
	-ex food & energy	0.2% (2.7% Y/Y)
	IP	0.1%
	Capacity Utilization	77.4%
	Fed’s Beige Book
Thursday	Initial Claims	234K
	Continuing Claims	1970K
	Retail Sales	0.1%
	-ex autos	0.3%
Friday	Housing Starts	1.30M
	Building Permits	1.39M
	Michigan Sentiment	61.4

Source: tradingeconomics.com

In addition to this, we hear from eight FOMC members, so it will be interesting to see if the erstwhile doves are willing to join Waller and Bowman in their call for a July rate cut. If we start to see momentum build for a July cut, something which is not currently evident, look for the dollar to suffer substantially. But absent that, I have a feeling we are going to range trade for the rest of the summer.

Good luck

Adf

Struggling…Juggling

Posted on May 21, 2025 by fxpoet

For users of Bloomberg worldwide
This morning, the service has died
So, traders are struggling
As it’s like they’re juggling
With one hand, behind their back, tied

While market activity continues, it seems that the single issue receiving the most attention today is that the Bloomberg professional service is not working almost anywhere in the world. From what I have seen so far, there is no explanation other than technical problems, and on the Bloomberg website that I reference (the professional service is way too expensive for poets) the only mention has been oblique in the news that auctions in the UK and Europe have been extended in time until the service is operational again. However, on X, the memes are wonderful. I’m sure they will fix things shortly, and the financial world will go back to worrying about things like interest rates and equity valuations, but right now, this is the story!

JGB markets
Are garnering far more press
Than Ueda wants

Yesterday’s story about JGB yields continues to be a key market issue this morning, and likely will be so for some time to come. Yields there continue to climb and as we all know, the fiscal situation in Japan has been tenuous at best. The Japanese government debt/GDP ratio is somewhere around 263%. Consider that when the US has been deemed the height of fiscal irresponsibility with a number half that high. Granted, Japan is a net creditor nation, which is why they have been able to maintain this situation for so long, but as with every other situation where trends seem to go on forever, at some point they simply stop.

Sourve: tradingeconomics.com

The thing that seemed to allow Japan to continue for so long was the fact that inflation there had remained quiescent, for decades. It has been more than twenty years since official Japanese policy was to raise inflation. Alas, to paraphrase HL Mencken, be careful what you wish for, you just may get it good and hard. It appears that the good people of Japan are beginning to feel what it is like when a government achieves a policy goal after twenty years. Notably, the key issue is that inflation, after literally decades of negative or near zero outcomes, has risen back to levels not seen since the early 1990’s, arguably two generations ago. (The blip in 2014 was the result of the rise in Japan’s GST, their version of VAT, to 10%, which was a one-off impact on prices that dissipated within 12 months.)

This lack of inflation was deemed the fatal flaw in the Japanese economy, despite the fact that things there seem to work pretty well. The infrastructure is continuously modernized and works well and while my understanding is that a part of the population was frustrated because their nominal incomes weren’t rising, with inflation averaging 0.0% or less for 20 years, they weren’t falling behind. However, the broad macroeconomic view from policy analysts around the world was that Japan, a nation with an actual shrinking population, needed to do everything they could to push inflation higher in order to better the lives of its citizens. Well, they have done so with inflation there now higher than the most recent readings in the US. I fear that the good people of Japan are going to be asking many more questions about why the government thought this was a good idea as prices continue to rise. It is already apparent in the approval numbers of the current government with readings on the order of 27%.

So, now we must ask, how will different markets interpret the ongoing rise in inflation. We are already seeing what is happening in long-dated JGB markets, with the 30yr and 40yr yields rising to record levels, albeit below, and barely at current inflation readings respectively. But, as I mentioned yesterday, the broader market question will be at what point will Japanese investors, who are one of the key sources of global capital, decide that the yield at home is sufficient to bring assets back from around the world, notably the US. That level has not yet been reached although I suspect we are beginning to see the first signs of that.

In the event this occurs, and I believe it will do so, what will be the impact on markets? The first, and most obvious outcome will be a significant rise in the JPY (+0.6%). As you can see below, while the yen has strengthened compared to levels seen in mid and late 2024, it remains far weaker than levels seen over the past 30+ years, where the average has been 112.62, more than 20% stronger than the current levels.

As to Treasury markets, Japan remains the largest non-US holder of Treasuries and while I doubt they will sell them aggressively, it would certainly be realistic to see them allow current positions to mature and not buy new ones but rather bring those funds home (stronger yen) while removing a key bid for the market (Kind of like their version of QT!). Higher US yields are a real possibility here. As to equities, these will likely be sold, although the Japanese proportion of holdings is not as large relative to others, but with rising yields and a falling dollar, it doesn’t feel like a good environment for equities.

Of course, all of this is dependent on the status quo in US policy remaining like it is today. If President Trump can get Congress to implement his policies and they are successful at reinvigorating the US domestic economy, two big Ifs, these views will be subject to change. The key to remember about markets, especially currency markets, is that there are two sides to every story, and expecting a particular outcome because one side of the equation moves may be quite disappointing if the other side moves and was unanticipated.

Ok, I spent far too long there, but not that much else is exciting. The other story with some press has been driving oil markets higher (WTI +0.85%) with a gap up on news that Israel was considering a strike against Iranian nuclear facilities. Naturally, this has been denied, and oil’s price has retreated from the early highs seen below.

Source: tradingeconomics.com

Sticking with commodities, gold (+0.5%) continues to rally, perhaps on fears of that Israeli news, or perhaps simply because more and more investors around the world want to own something they can hold onto and has maintained its value for millennia.

In the equity markets, yesterday’s modest US declines were followed by weakness in Japan (-0.6%) but strength in China (+0.5%) and Hong Kong (+0.6%). As to the rest of the region, there were many more gainers (Korea, India, Taiwan, Australia) than laggards (Malaysia, Thailand) so a net positive tone. In Europe, though, modest declines are the order of the day with the CAC (-0.5%) the worst performer and the FTSE 100 (-0.1%) the best. US futures are also pointing lower at this hour (7:50) down on the order of -0.5% across the board.

Treasury yields (+4bps) have moved higher again this morning and have taken the entire government bond complex along with them as all European sovereign yields are higher by between 4bps (Germany, Netherlands) and 6bps (Switzerland, UK). We have already discussed JGB yields where 10yr yields have moved higher by 2bps.

Finally, the dollar is softer across the board this morning with the DXY (-0.45%) a good proxy of what is happening. The outliers are KRW (+1.2%) and NOK (+1.1%) with the latter an obvious beneficiary of oil’s rise while the former seems to be climbing in anticipation of something coming out of the G10 FinMin meeting in Canada this week. Otherwise, that 0.45% move is a good proxy for most things.

On the data front, we have another day sans anything important although EIA oil inventories will be released with a solid draw expected. Fed speakers were pretty consistent yesterday explaining that patience remains a virtue in a world where they have no idea what is going on. Fed funds futures markets have pushed the probability of a June cut down to 5% and only 50bps are priced in for all of 2025. (Personally, I see no reason that a cut is coming.)

The dollar remains on its back foot, and I expect that the combination of pressure from the Trump administration to keep it that way is all that is going to be necessary to see things continue with this trend. Of course, an Israeli strike on Iran would change things dramatically in terms of risk perception and likely support the dollar, but absent that, right now, lower is still the call.

Good luck

Adf

Set Cash On Fire

Posted on May 19, 2025 by fxpoet

On Friday, the Moody’s brain trust
At last said it’s time to adjust
America’s debt
As we start to fret
That it’s too large and might combust

So, Treasury yields are now higher
As pundits explain things are dire
But elsewhere, as well
Seems bonds are a sell
As governments set cash on fire

Arguably, the biggest story of the weekend happened late Friday evening as Moody’s became the third, and final, ratings agency to downgrade US government debt to Aa1 from Aaa. S&P did the deed back in 2011 and Fitch in 2023. The weekend was filled with analyses of the two prior incidents and how markets responded to both of those while trying to analogize those moves to today. In a nutshell, the first move in both 2011 and 2023 was for stocks to fall and bonds to rally with the dollar falling. However, in both of those instances, those initial moves reversed over the course of the ensuing months such that within a year, markets had pretty much reversed those moves, and in some cases significantly outperformed, the situation prior to the downgrade.

Looking at Moody’s press release, they were careful to blame this on successive US administrations, so not putting the entire blame on President Trump, but in the end, it is hard to ignore that the nation’s fiscal statistics regarding debt/GDP and debt coverage are substantially worse than that of other nations that maintain a Aaa rating. As well, their underlying assumption is that there will be no changes in the current trajectory of deficits and so no reason to believe things can change.

The most popular weekend game was to try to estimate how things would play out this time although given the starting conditions are so different in the economy, I would contend past performance is no guarantee of future outcomes. In this poet’s eyes, it is not clear to me that it will have a long-term material impact on any market. We have already been hearing a great deal about how Treasuries are no longer the safe haven they were in the past. I guarantee you that institutions looking for a haven were not relying solely on Moody’s Aaa rating for comfort. In addition, given a key demand for Treasuries is as collateral in the financial markets, and the Aa1 rating is just as effective as a Aaa rating from a regulatory risk perspective, I see no changes coming

As to equities, I see no substantive impact on the horizon. The equity market remains ~~over~~ richly valued and if it were to decline, I don’t think fingers could point to this action. Finally, the dollar has been declining since the beginning of the year and remains in a downtrend. Using the DXY as our proxy, if the dollar falls further, should we really be surprised?

source tradingeconomics.com

To summarize, expect lots more hyperbole on the subject, especially as many analysts and pundits will try to paint this as a failure of the Trump administration. And while bond yields may rise further, as they are this morning, given the fact that yields are rising everywhere around the world, despite no other nations being downgraded, this is clearly not the only driver.

In fact, one could make the case that bond yields are rising around the world because, like the US, nations all over are talking about adding fiscal stimulus to their policy mix. After all, have we not been assured that Europe is going to borrow €1 trillion or more to rearm themselves? That is not coming out of tax revenue, that is a pure addition to the debt load. As well, is not a key part of the ‘US will suffer more than China in the tariff wars’ story based on the idea that China will stimulate the domestic economy and increase consumption (more on that below)? That, too, will be increased borrowing. I might go so far as to say that the increased borrowing globally to increase fiscal stimulus will lead to higher nominal GDP growth everywhere along with higher inflation. I guess we will all learn how things play out together.

Ok, so now that we have a sense of THE big story, let’s see how markets behaved elsewhere. I thought that today, particularly, it would be useful to see how bond markets around the world have behaved in the wake of the Moody’s news. Below is a screenshot from Bloomberg this morning. note that every major market that is open has seen bonds sell off and I’m pretty confident that Canada’s at the very least, will do so when they wake up. Ironically, the European commission came out this morning and reduced their forecasts for GDP growth and inflation this year and next and still European sovereign yields are higher. I have a feeling that this news is not as impactful as some would have you believe.

Turning to equity markets, Friday’s US rally is ancient history given the change in the narrative. And as you can see below from the tradingeconomics.com page, every major market is softer this morning (those are US futures) with only Russia’s MOEX rising, hardly a major market. Again, it appears the fallout from the ratings cut is either far more widespread, or not a part of the picture at all. It seems you could make the case that if European growth is going to underperform previous expectations, equity markets there should underperform as well. The other two green arrows are Canada and Mexico, neither of which is open as of 6:30 this morning.

Commodity markets are the ones that make the most sense this morning as oil (-1.3%) is under pressure, arguably on a weaker demand picture after softer Chinese data was released overnight. While the timing of the impacts of the trade war is unsettled, there is certainly no evidence that China is aggressively stimulating its economy. This was very clear from the decline in Retail Sales, Fixed Asset Investment and IP, although the latter at least beat expectations. But the idea that China is changing the nature of their economy to a more consumption focused one is not yet evident. Meanwhile, metals markets are all firmer this morning with gold (+1.2%) leading the way, arguably as a response to the ratings downgrade. This has dragged both silver (+0.9%) and copper (+1.0%) along for the ride. It is not hard to imagine that sovereign investors see the merit in owning storable commodities like metals in lieu of Treasuries, at least at the margin. But also, given the dollar’s weakness, a rally in metals is not surprise.

Speaking of the dollar’s weakness, that is the strong theme of the day along with higher yields across the board. Right now, the euro (+1.0%) and SEK (+1.0%) are leading the way higher although the pound (+0.9%) is also doing well. Perhaps this has to do with the trade agreement signed between the UK and EU reversing some of the Brexit outcomes at least regarding food and fishing, although not regarding regulations or immigration. JPY (+0.6%) is also rallying as is KRW (+0.75%) and THB (+0.9%) as there is a continuing narrative that stronger Asian currencies will be part of the trade negotiations. Finally, Eastern European currencies are having a good day (RON +2.3%, HUF +1.8%, CZK +1.2%, PLN +1.0%) after the Romanians finally elected a president that was approved by the EU. Yes, they had to nullify the first election and then ban that candidate from running again, but this is how democracy works!

On the data front, there is very little hard data to be released this week, although it appears every member of the FOMC will be on the tape ahead of the Memorial Day weekend. Perhaps they are starting to feel ignored and want to get their message out more aggressively.

Today	Leading Indicators	-0.9%
Thursday	Initial Claims	230K
	Continuing Claims	1890K
	Flash Manufacturing PMI	50.5
	Flash Services PMI	51.5
	Existing Home Sales	4.1M
Friday	New Home Sales	690K

Source: tradingeconomics.com

Actually, as I count, there are three members, Barr, Bowman and Waller who will not be speaking this week, although Chairman Powell doesn’t speak until next Sunday afternoon. In the end, the narrative is going to focus on the ratings cut for a little while, at least for as long as equity markets are under pressure along with the dollar. However, when that turns, and I am sure it will, there will be a search for the next big thing. I have not forgotten about the potential large-scale changes I discussed on Friday, and I am still trying to work potential scenarios out there, but for now, that is not the markets’ focus. Certainly, for now, I see no reason for the dollar to gain much strength.

Good luck

Adf

This is the End

Posted on April 22, 2025 by fxpoet

Apparently, this is the end
So says every article penned
The markets are tanking
But nobody’s banking
On help to arrest the downtrend

The pundits’ unanimous line
Is things before Trump were just fine
Yes, debt was insane
But that gravy train
Allowed them to drink the best wine

Every financial website lead this morning is how President Trump’s policies are causing the worst slide in equity prices in forever, with my favorite today in the WSJ describing this as the worst performance in April since 1932! Much has been made about how President Trump is undermining the Fed’s credibility, as though the Fed has that much credibility to undermine. This is the group that declared stable prices to be an increase in their favored indicator, core PCE, of 2.0% annually, and complained vociferously when inflation was slightly below that level for a decade. In order to adjust things, they changed their target to an average of 2.0% over time, then watched their metrics, in the wake of the Covid fiscal response, explode higher. Now, after more than four years of their target metric above their target, they are concerned they are losing their credibility because of President Trump.

Source: tradingeconomics.com

Certainly, if they had been achieving their goals any time during the past four years, this argument might have had some force. However, given the history, I am suspect.

Nonetheless, this is today’s narrative, that equity markets are falling sharply because of Trump. It has nothing to do with the fact that US equity markets have been overvalued by nearly every measure since November 2012, (the last time the S&P 500 P/E ratio was at its mean of 16.14 vs today’s still very high 25.64). This is not to say that the president’s tactics have necessarily been the best possible, but we have all long known that a catalyst would come along and adjust prices to a more sustainable level.

Source: multpl.com

Once again, I will highlight that President Trump was elected with a mandate to make substantial changes to the way things work in the US, both the economy and other issues like immigration. Remember, too, that many of his supporters are not heavily invested in equity markets, so this is not really a problem for them. I believe he can tolerate a lot more downside in equity prices before feeling it necessary to address them. And if he is successful in signing some trade deals during his 90-day time frame, I expect that things will calm down quite quickly.

But right now, investors are very unhappy, and since virtually everyone in the media is an investor, we are going to hear a lot more on this topic, especially since they almost certainly didn’t vote for President Trump.

Here’s the thing about markets, overvaluations correct over time. In fact, often they result in under valuations as markets tend to overshoot in both directions. However, you have probably heard of the Buffett Indicator, which is Warren Buffett’s shorthand way of determining stock valuations. He simply divides the total market capitlaization of US equities by GDP. His view is that when that ratio is between 110% and 130%, equity markets are fairly valued. Below that, things are cheap, and it is a good time to buy stocks. Above that, like today, and good values are hard to find. You are also probably aware that Berkshire Hathaway is currently holding its largest cash position ever, a sign that he still thinks things are overvalued. One need only look at the below chart to see that while the recent decline in stocks has brought the indicator lower, its current level of 173% remains extremely overvalued.

Source: buffettindicator.net

All I am trying to do is offer some perspective on the recent movement. Risk appetite was over extended while the US ran 7% budget deficits and issued a massive amount of debt to fund it. Much of that funding went into risk assets. That situation has clearly changed, or at least that is the goal of the Trump administration. It is a painful transition, but likely one that we need to absorb for longer term fiscal and economic health.

Ok, let’s see how market behaved overnight, after a rout in the US yesterday, now that everybody is back at their desks. Major Asian markets were very quiet, with limited movement in Japan, China, Korea, Australia and India, although we did see sharp declines in Taiwan (-1.6%) and New Zealand (-2.25%) with the latter seeming to be one of the few markets tracking the US directly. The only news there was a larger than expected trade surplus, which doesn’t seem the type of thing to cause a sell-off. Meanwhile, in Europe, there is also little net movement with a couple of modest gainers (Spain, UK) and a couple of modest laggards (France Germany) with everything trading less than 0.5% different than their last closes. Interestingly, US futures are all higher by about 1.0% at this hour (7:05).

In the bond market, this morning is quiet everywhere with movements of +/-1bp the norm although yesterday did see Treasury yields climb 6bps in the session. Something that is starting to move in fixed income markets are credit spreads, which have been abnormally tight for a long time and may be starting to widen out to previous historical levels. If spreads start to widen, that will not help equity markets at all, and that could be the signal that policy adjustments are coming, both from the administration and the Fed. We will keep an eye here.

In the commodity markets, nothing is stopping the gold train, up another 0.7% this morning to another new high. This movement is parabolic and that cannot last very long. Beware of a correction.

source: tradingeconomics.com

In the meantime, silver (-0.2%) and copper (+0.5%) are still hanging around, but without the same panache as gold. In the oil market, WTI (+1.3%) has rebounded from yesterday’s decline as the latest stories are that capex by the oil majors is going to decline and with it, we will see a reduction in supply, hence higher prices. On the flip side, if a deal with Iran is signed and their oil comes back on the market freely, that will weigh on prices for at least a while.

Finally, the dollar, which along with equities, has been sold aggressively of late, is bouncing slightly this morning. This story remains perfectly logical as one of the reasons the dollar had been so strong was foreign investors bought dollars to buy the Mag7 and US equities in general. With US equities weakening, these foreigners are likely to start to sell more and take their money home, or elsewhere, but nonetheless, they don’t need those dollars. Certainly nothing has changed my bearish view here with today’s gains a modest correction. There are two outliers this morning, with MXN (+0.6%) and ZAR (+0.5%) the only currencies of note rallying against the greenback, both seemingly following the commodity rally.

On the data front, there is nothing noteworthy this morning, but a bit of data later in the week.

Wednesday	Flash Manufacturing PMI	49.4
	Flash Services PMI	52.8
	New Home Sales	680K
	Fed’s Beige Book
Thursday	Initial Claims	221K
	Continuing Claims	1880K
	Durable Goods	2.0%
	-ex Transport	0.2%
	Existing Home Sales	4.13M
Friday	Michigan Sentiment	50.8
	Michigan Inflation Expected	6.7%

Source: tradingeconomics.com

In addition, we have 7 Fed speakers over 8 venues this week, with four of them today. However, it is not clear that they have much impact these days. Expectations for a cut next month are down to 9% although the market is pricing 90bps of cuts this year. But, once President Trump started implementing his policies, the Fed slipped into the shadows. It is interesting that there are questions about the Fed’s credibility as lately, nobody has listened to them anyway. I don’t expect anything other than patience from them for now as they await the “inevitable” decline in the economy. However, until the data really starts to show something, and there is nothing forecast in this week’s releases, that points to economic weakness of note, they are on the sidelines.

Overall, I expect more volatility in risk assets, and I do believe the trend for foreign investors to reduce their exposure to the US will continue. That, too, will weigh on the dollar. Maybe not today, but another 10% this year is quite viable.

Good luck

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End of Days

Posted on April 9, 2025 by fxpoet

The one thing about which we’re sure
Is risk assets lost their allure
It’s not clear quite yet
How big a reset
Is coming, and what we’ll endure

Now, I don’t think its end of days
And this could be quite a short phase
But don’t be surprised
If answers devised
Result in a lack of real praise

Chaos continues to reign in the markets as volatility across all asset classes has risen substantially. Perhaps the best known indicator, the VIX, is back at levels seen last during the Covid pandemic. Remember, the VIX is a compilation of the implied volatility of short-term equity options, 1mo – 3mo. While markets can technically be volatile moving in either direction, the VIX has earned the sobriquet of ‘fear index’ as equity volatility most typically rises when stock markets fall. As you can see from the below chart, the movement has not only been large, but very quick as well.

Source: finance.yahoo.com

The key thing to remember is that while volatility levels can rise very quickly, as the chart demonstrates, their retracement can take quite a long time to play out. Part of that is that even when things start to calm down, many investors and traders are worried about getting burnt again, so prefer holding options to underlying cash positions. At least until the time decay becomes too great. My point is that look for trepidation amidst the trading community and markets in general for a while yet, even if by Friday, the tariff situation is made perfectly clear. Of course, with that as background, we cannot be surprised that the Fear & Greed Index has made new lows.

Source: cnn.com

However, arguably of more concern is the price action in US Treasuries, which despite the havoc in the market, are not playing their historical safe haven role. Instead, Treasury bond yields are rising, actually trading as high as 4.50% around midnight last night although they have since retraced a bit. The bond market has a generic volatility index as well, the MOVE index, and it, too, is trading at very high levels, the highest since the GFC.

Source: finance.yahoo.com

In many ways, this is of much greater concern to markets, as well as both the Treasury and the Fed. The 10-year US Treasury is the benchmark long-term rate for the entire world. A rise in the MOVE index may indicate that there is something wrong with the bond market and its inner workings, or it may be an indication that inflation expectations are rising quickly. Whatever the reason, you can be certain the Fed is watching this far more carefully than the VIX.

I have heard two explanations for the bond market’s recent performance as follows: first, there are those who are saying that China is selling its Treasury bonds and using the dollar proceeds to buy gold. Now, while their holdings have been slowly shrinking, they still have just under $800 billion, so that is a lot of paper and would clearly have an impact. The thing about this thesis is we will be able to determine its reality when China next reports their reserve numbers next month.

The other explanation rings truer to me and that is the bond basis trade may be unwinding. Briefly, the bond basis trade is when investors, typically hedge funds, arbitrage the difference in price between cash Treasury bonds and Treasury bond futures on the exchange. The current positioning is these funds are long cash and short futures, and since it is a basis trade, they typically lever it up significantly, with leverage ratios of up to 100x I understand. The total size of this trade is estimated at > $1 trillion. Now, if this arbitrage disappears, or these funds are forced to liquidate this strategy quickly, it could be a real problem for the Treasury market.

Ever since the GFC and the Dodd-Frank legislative response, banks no longer carry large bond risk positions and are not able to absorb large transactions seamlessly. During Covid, you may remember that Treasury yields were all over the map, crashing and then exploding higher one day to the next, and that was caused by this basis trade unwind. Back then, the Fed purchased nearly $1.7 trillion in QE to stabilize the market, and by all accounts, the basis trade was half the size then that it is now.

Remember, too, arguably the most important part of the Fed’s mandate is to maintain Treasury bond market stability. Without this, the US will not be able to fund its debt and deficits. So, whatever your view of how Chairman Powell may respond to the tariff story, which seems to be patience for now, if the bond market starts to break, you can be sure the Fed will step in. QT will reverse to QE in a heartbeat as they offset the impact of this position unwinding. If that is the case, I anticipate we will see further weakness in equities and the dollar, while gold will truly shine both literally and figuratively. I’m not saying this is what is going to happen, just that this explanation makes more sense to me.

Ok, now that tariffs have officially kicked in as of midnight last night, let’s see how markets are responding this morning. Most equity markets continue to struggle after yesterday’s disappointing US session, where higher opens eroded all day with the major indices all closing on their session lows. This bled into Asia where Japan (-3.9%) gave up most of yesterday’s gains although both China (+1.0%) and Hong Kong (+0.7%) held up well amid government support. As to the rest of the region, Taiwan (-5.8%) was worst off, but other than Thailand and the Philippines, both of which managed gains, every other index was lower, often sharply. In Europe, the realization of the tariffs is hurting with declines of -3.0% to -4.0% across the board. As to the US futures market, at this hour (7:25), all three major indices are lower by at least -1.0%.

Bond yields are all over the place this morning with Treasuries (+8bps) continuing their recent climb amid the fears discussed above. However, in Europe, things are such that German yields (-1bp) are doing fine while UK Gilts (+9bps) are suffering along with Treasuries. The rest of the continent, save the Netherlands, has also seen yields rise, but much less, between 2bps and 5bps. Overnight, JGB yields were unchanged as players are uncertain as to the next steps by the BOJ there.

In the commodity market, oil (-5.6%) is once again under major pressure. This feels like a confluence of both technical factors (the price has broken below long-term support at $60/bbl and is now testing for lows) and fundamental factors, with OPEC raising output and the mooted recession likely to reduce demand. Interestingly, lower oil prices are a tremendous geopolitical weapon for the US as both Russia and Iran are entirely reliant on them for financing their activities. As to the metals complex, gold as regained its luster (sorry 😁) rallying 2.8% and well above the $3000/oz level. This has taken silver (+3.1%) and copper (+3.5%) along for the ride. It seems to me the copper story is not in sync with the oil story as a recession would likely drive copper prices lower, but that is this morning’s movement.

Finally, the dollar is softer again this morning with the euro (+0.8%) trading through 1.10 and the yen (+1.0%) back below 145.00. It’s interesting because there was a story last night about how the new Mr Yen, Atsushi Mimura, was speaking to the BOJ amid concerns that the yen has been too volatile. However, to my eye the movement has been relatively sedate, strengthening gradually and still, as can be seen in the chart below, substantially weaker than for the many years prior to the Fed beginning to tighten policy in 2022.

Source: finance.yahoo.com

The other noteworthy move is CNY (+0.5%) which after slipping to levels not seen since 2007, has retraced somewhat. If Treasury bonds are not seen as haven assets for now, the dollar has further to fall.

On the data front, the FOMC Minutes at 2:00pm are released, but given all that has happened since then, it is hard to get excited that we will learn very much new. We also see EIA oil inventories with a modest build expected, but this market seems likely to have adjusted those numbers outside any forecasting error bars.

The tariff story will continue to drive markets for now as investors try to determine the best way to protect themselves until things settle down. And things will settle down, but when that will happen is the $64 trillion question. FWIW, which is probably not much, my sense is that we have a few more weeks of significant chop, as we await clarity on the tariff policy (meaning its goals). I still believe there will be a number of deals that will reduce the initial numbers, but the ultimate goal is to isolate China. It is going to be messy for a while yet. As to the dollar through all this, my sense is lower, but not dramatically so.

Good luck

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Hair All on Fire

Posted on April 7, 2025 by fxpoet

There once was a group of old men
Who spoke via paper and pen
Last week, this odd choir
With hair all on fire
Explained that the world would soon end

I wonder if this week we’ll learn
This group now has nought left to burn
If so, we may find
That all of mankind
Could yet weather any downturn

I have no idea how this is going to play out and truthfully neither does anybody else. While I am happy to admit that fact, my sense is others will not be so forthcoming. President Trump made clear that he wanted to change the way things are done. He was explicit in his efforts to rearrange the global trading system, and by extension the global economy, so that it was less punitive to American businesses. At least in his mind.

I think the other thing to remember is he was elected by Main Street, not Wall Street. The MAGA movement was originally composed of small-town folks who had not benefitted from the financialization of the economy that really accelerated with the GFC. And most of these folks don’t look at the stock market every day, nor the bond market nor the value of the dollar in the FX market. They do see the price of gasoline at the pump, and the price of groceries in the store, but otherwise, market activity is not a primary focus.

I mention this because I think it is critical to remember Trump’s primary audience if we are to understand why he is doing what he is doing. Bill Ackman screaming on X is not the president’s concern. Redeveloping the US manufacturing base is his goal.

Now, will his actions lead to that outcome? There are many naysayers and most of them write for major news outlets or are politically motivated (isn’t that the same thing?). But remember, Trump doesn’t have to run for office again. I suspect the fact that the Senate passed their version of the “big, beautiful bill” for taxes and the budget last week was of far more interest to the President than the fact that Senator Chuck Schumer is calling his actions reckless.

My point here is to highlight that all those who believe that President Trump will succumb and change his stance because equity prices have fallen are still not listening to the man.

Speaking of prices at the pump, there was news last week that was missed by many, if not most, people, and that is likely to have a significant impact on oil prices. It turns out, that in the wake of the tariff announcements, OPEC explained they would be increasing production by 411K bbl/day beginning in May with potentially larger increases going forward. It appears that the loss of market share is becoming untenable in their eyes, and so they are on their way to regaining that, even if prices are to decline further.

There are some who speak of a deal with President Trump, who you may recall has been seeking to lower oil prices, and I suppose that is quite possible. But, regardless of the driving force behind the action, as my friend Alyosha on Substack explains eloquently, it is quite possible that we are entering a new regime in oil prices. This chart from his most recent Substack posting is instructive.

In essence, his theory, which this chart describes, is we may well be heading into a new long-term range of oil prices that is far below what we have been used to, especially since the Russian invasion of Ukraine. Remember, if energy prices decline, that reduces cost pressures for the entire economy. And here we are this morning with oil (-4.0%) breaking below $60/bbl and down -10% in the past month. Despite all the headlines that tariffs are going to raise prices, this is something that will clearly offset any general rise in price pressures.

But markets are still digesting the tariff news and are not happy about it. Apparently, several nations have reached out to the president to discuss what can be done to address this change in tariff behavior, including the UK, Japan and Taiwan. As a negotiating tactic, it strikes me that Trump will not want to waver if he is to achieve better trade deals for the US. And while he may be subject to the slings and arrows of a negative press in the US, there is nobody on the planet who is more capable of absorbing those and continuing on his merry way.

Ok, let’s see the damage wrought in the overnight markets, where adjustments are still being made. Before we start, though, remember, US share prices were at extremely high valuations prior to all this with just seven companies representing nearly one-third of the value of the S&P 500. The common refrain was that these conditions could not be maintained forever. That refrain was correct, but the speed of the adjustment has clearly been more rapid than many had ~~hoped~~ expected. The below reading of the Fear and Greed Index speaks for itself. But remember, this is seen as a contra-indicator, where extreme fear is seen as a buying opportunity.

Source: cnn.com

Ok, now to markets. The nearly -6% declines across the board in the US on Friday have been followed by even large declines in Asia, with the Nikkei (-7.8%), Hang Seng (-13.2%) and CSI 300 (-7.1%) all suffering greatly. Taiwan (-9.7%) and Singapore (-7.6%) were the other largest movers with the rest of the region declining on the order of -4.0% give or take a bit. In Europe, the losses are not quite as severe, with declines on the continent averaging -6.2% or so and UK shares slipping “just” -4.8%. interestingly, US futures, which had been down as much as a further -6.0% in the early part of the overnight session, have rebounded slightly and now (5:40) sit lower by around -3.4% or so. It appears we are seeing the first nibbles of value buyers.

Bond yields continue to decline as the flight to the relative safety of government debt is rampant. While Treasury yields (-4bps) are only a bit lower, in Europe, German bunds (-12bps) and French OATs (-8bps) are leading the way. Recession concerns have risen everywhere, with the punditry now highly convinced a recession is a given and the only question is whether or not this will turn into a depression. That feels premature to me, but I’m just a poet. As to JGB yields, they, too, have tumbled further as funds flow back to Japan, and are down a further -8bps this morning, now yielding just 1.09%, a far cry from the 1.60% level just two weeks ago.

I’ve already discussed oil so a look at metals shows gold (-0.3%) consolidating last week’s declines and still above $3000/oz. My take is gold’s decline was a result of equity losses and margin calls being covered by gold positions. I do not believe the barbarous relic has seen its highs. As to the other metals, silver (+2.3%) is bouncing this morning, although it did fall more than 10% in the past week, and copper (-1.4%) is under increasing pressure on the weakening economic growth story.

Finally, the dollar is all over the map, showing net strength this morning, but weaker vs. the two main havens, JPY (+0.55%) and CHF (+0.9%). Interestingly, the euro is unchanged on the day as it appears traders cannot decide who will be more greatly impacted, the US or Europe. But otherwise, the dollar is generally firmer with NOK (-1.75%) suffering alongside oil, MXN (-1.5%), ZAR (-1.3%) and CLP (-1.7%) all feeling the pressure from the tariffs. Other G10 currencies are softer, but not as dramatically, with AUD and NZDZ (both -0.5%) and CAD (-0.3%) moving more in line with a normal session. While we have gotten used to the idea that the dollar rallies on a risk-off thesis, given the nature of this particular version of risk-off, I have a feeling the dollar’s gains may be capped. However, my previous thesis on the declining dollar is much harder to discern given the changing nature of economic outcomes.

As an aside, the Fed funds futures market is now pricing a 50% probability of a Fed cut in May and a total of 113bps of cuts by the end of 2026. However, this will all depend on the evolution of things going forward, and, similar to the fear and greed index above, may represent an extreme view right now.

On the data front, Friday’s better than expected NFP data was lost in the shuffle. The front of this week doesn’t have much although we do get CPI on Thursday.

Today	Consumer Credit	$15.2B
Tuesday	NFIB Small Biz Optimism	101.3
Wednesday	FOMC Minutes
Thursday	Initial Claims	224K
	Continuing Claims	1915K
	CPI	0.2% (2.6% Y/Y)
	Ex food & energy	0.3% (3.0% Y/Y)
Friday	PPI	0.1% (3.3% Y/Y)
	Ex food & energy	0.3% (3.6% Y/Y)
	Michigan Confidence	54.7

Source: tradingeconomics.com

It’s hard for me to believe the FOMC Minutes will matter much given all that has transpired since then. We do hear from seven more Fed speakers this week, but their comments have been swallowed by the ether as none of them, Chairman Powell included, has any inside track as to how things will evolve going forward.

My experience is that markets have a great deal of difficulty remaining in max fear mode for very long as it is simply too tiring for market participants. I don’t ever recall seeing the fear and greed index at 4, even during Covid (it is only about 12 years old), but my take is we are likely to see at least a respite here, before any significant further declines in risk assets. As to the dollar, if that is the case, I expect it will cede some of its recent gains, at least vs. the EMG bloc.

Good luck (we all need it!)

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Squealed Like Stuck Pigs

Posted on April 4, 2025 by fxpoet

What many just don’t comprehend
Is tariffs are not near the end
Of policy changes
As Trump rearranges
The world into foe and to friend

And while Wall Street squealed like stuck pigs
Trump’s boosters just don’t give two figs
They’re willing to try
The Trump calculi
If they see it hurts the bigwigs

I’m old enough to remember when Nonfarm Payrolls were the most important thing to market participants regardless of the asset class. Ahh, those were the days. It is remarkable that across major business headlines, I haven’t seen anything discussing the release for later this morning. Don’t misunderstand me, I’m not upset about that fact, I think there has been far too much focus on that data point for far too long, but I am surprised. This may be the best indicator that we are in a new regime for finance and economics. It appears that most of the things the analyst community used to consider important are now merely afterthoughts.

I thought the WSJ had the most consequential article in this morning’s ‘paper’ asking, who is going to buy the $400 billion of stuff that China makes that will no longer be price competitive in the US? They weren’t mentioned explicitly, but I imagine that Temu and Shein are both going to find their business models significantly impaired. But will other “free trading’ nations allow all that stuff across their borders tariff free? The Chinese mercantilist model was built with the idea that if they could produce stuff more cheaply than other nations, whether through subsidy or efficiency, other nations would welcome that stuff. It remains to be seen how well that model holds up given the changes wrought by President Trump.

On a different note, I have read many comparisons of yesterday’s market declines to the March 2020 Covid panic, but my take is it is far more akin to the September 2008 Lehman Brothers collapse, at least from the tone of the market. Covid was an exogenous event while Lehman and the tariffs were home-made. The issue with the GFC and the current time was/is that they are systemic alterations which means that things will be different going forward in finance and economics. Covid clearly changed our lives based on the government response, but it didn’t change the way markets behaved.

At this point, there is no indication that President Trump is going to change his tune, and why would he? Again, amongst the key financial market goals he and Secretary Bessent have touted were a reduction in 10-year yields, lower by 75bps since inauguration, (✔️), a reduction in the price of oil, lower by $14/bbl or 18%, (✔️) and a lower dollar relative to other currencies lower by 6.5%,(✔️). Ask yourself, do you really think they are unhappy with the current situation?

I have no idea how things will play out from here, and in reality, neither does anybody else. Reliance on models that were built with past assumptions does not inspire confidence. As well, we have barely seen the response to these tariffs, although just moments ago China indicated they would be imposing 34% tariffs on all US goods entering their country. But anybody who believes they know the end game is delusional. This is the beginning of the change, and there will be much more to come across many different aspects of the economy and markets as the year progresses. Interesting times indeed.

With that in mind, let’s see how day two of the new world order is playing out (and to think, there were all those conspiracy theories about a new world order before, but this was not what they had in mind.) Green is a hard color to find on screens again today as after yesterday’s rout in US markets, the follow-through in Asia was almost complete. Indonesia (+0.6%) managed a gain somehow, but every other major market declined, some quite substantially. Singapore (-3.0%), Thailand (-3.6%) and Tokyo (-3.1%) were the biggest losers, but shares everywhere fell with most declining more than -1.0% on the session. Interestingly, European shares are having a much worse session today than yesterday with Italy’s FTSE MIB (-7.1%) leading the way although Spain’s IBEX (-5.5%), the DAX (-4.5%), CAC (-3.8%) and FTSE 100 (-3.5%) are not exactly loving life today either. As to US futures, they are pointing much lower again today, -3.0% or so for all the major indices.

Bonds, however, are in great demand with yields virtually collapsing as investors seek anyplace that is not equities to find shelter from this storm. Treasury yields have fallen a further 15bps this morning and you can see in the chart below, just how large this decline has been. In fact, yields have almost retraced to the level just before the Fed started cutting rates last September!

Source: tradingeconomics.com

But bonds everywhere in the world are in demand with yields on European sovereigns lower by between -7bps (Italy and Greece) and -15bps (Germany) as credit quality has also entered the picture there. Finally, JGB yields have also tumbled, down -18bps overnight, as Japanese investors flee global markets and bring their money home.

Arguably, though, the biggest move has been in oil (-6.9%) which is now down to levels not seen since it was rebounding from Covid inspired lows back in 2022.

Source: tradingeconomics.com

I would contend this is almost entirely a recession fear, lack of forward demand story, although I believe OPEC+ is still planning on reducing its production cuts as the year progresses. I imagine the latter is subject to change based on the economic outcomes. In the metals markets, gold (+0.15%) after a sell-off yesterday, is consolidating for now. Given the amount of leverage that abounds and given that when margin calls come, folks sell what they can, not what they want to, I suspect much of gold’s selling yesterday was forced rather than based on fear. Rather, I suspect gold will outperform as it maintains its ultimate haven status. The same, though, is not true for other metals with silver (-1.5%) and copper (-4.2%) both sharply lower this morning. Certainly, in copper’s case, given the increased recession fears, it can be no surprise that its price is declining.

Finally, turning to the dollar, after a sharp decline yesterday, largely across the board, this morning the picture is a bit more mixed with a rebound against some currencies (AUD -3.0%, NZD -2.5%, SEK -1.7%, NOK (-2.1% although also inspired by oil’s precipitous decline.). However, both the yen (+1.0%) and Swiss franc (+1.25%) are continuing to display their haven attributes, while the euro (-0.1%) seems caught in the middle. In the EMG bloc, though, the dollar is quite solid this morning with MXN (-1.9%), ZAR (-1.7%) and CLP (-1.0%) all falling. Of note, CNY (0.0%) has barely moved throughout the entire process.

As I mentioned above, today we do see the NFP report, although my take is a strong report will be ignored as old regime, while a weak report will be ‘proof positive’ a recession is near. Here are the expectations as of this morning:

Nonfarm Payrolls	135K
Private Payrolls	127K
Manufacturing Payrolls	4K
Unemployment Rate	4.1%
Average Hourly Earnings	0.3% (3.9% Y/Y)
Average Weekly Hours	34.2
Participation Rate	62.4%

Source: tradingeconomics.com

Will the data really matter? I don’t think so, at least not to policy makers as they realize (I hope) the world today is different than when this data was collected. At this point, the market is now pricing in a full 75bps of rate cuts by year end from the Fed with a ~30% probability of a cut early next month. But Powell and company don’t have any idea how this will play out either. I fear that we are in a market situation where volatility is the dominant theme, in both directions. Remember, Donald Trump is best thought of as the avatar of volatility. He has earned that nickname. This is why I harp on maintaining hedges, the world is a tricky place.

Good luck and good weekend

Adf

Quite Miffed

Posted on April 3, 2025 by fxpoet

By now, each of you is aware
More tariffs, the Prez did declare
Some nations will scream
While others will scheme
To Trump, though, in war all is fair

The market reaction was swift
With equities in a downshift
While Treasuries rallied
Pure gold, lower, sallied
And everyone worldwide’s quite miffed

Once again, President Trump did exactly what he told us he was going to do from the start. He applied reciprocal tariffs on virtually every nation in the world, although at a rate claimed to be ~50% of their tariffs on the US, (as calculated by the White House and which included quotas and non-tariff barriers as well.) In addition to Israel, which pledged to reduce tariffs to 0% on US goods if the US would do the same, it appears Canada has also agreed that deal. I expect that we will hear different responses from nations all around the world, but remember, the one thing the president has made clear is that retaliation by other nations will be met with a significantly higher response from the US. I expect that smaller nations may find themselves in very difficult straits, although larger ones have more potential to respond. But, in the end, the US remains the consumer of last resort, and every nation on the list realizes that losing the US market will not help their economies.

The market response was immediate with US equity futures plummeting on the open of the evening session and sharp declines in Asian equities as well. Treasury yields fell along with the dollar, while gold after an initial rally, reversed course and is now lower on the day as well.

Analysts around the world are out with early forecasts of the “likely” impacts of these tariffs although I would take them with a grain of salt. Remember, analyst macro models have been pretty useless for a while, ever since the underlying conditions changed as I described earlier this week, so it is not clear to me that applying broken models to a new event is likely to offer accurate estimates of future activity. However, there is a pretty clear consensus, which is that inflation is going to rise while economic activity is going to decline, probably into a recession. Personally, I am confused by this analysis as every one of these analysts continues to believe that a recession drives prices lower and reduces inflation, but I’m just reporting on what I have seen.

If pressed, I expect that we will see several nations reduce their tariff structures in response to this, similar to Canada and Israel, and US tariffs will decline there as well. Other nations will dig in their heels and trade activity between the US and those nations will decline. But I will not even hazard a guess as to which nations will do what. Political pain is a funny thing, and different leaders respond differently.

My sincere hope is that now that the tariffs have been imposed, we can move on with our lives and discuss other issues because frankly, I am really tired of this topic.

Masked by the tariff mania was news that the US Senate has moved forward on its budget resolution bill which if passed and combined with the House, will allow the process to start to legislate for fiscal year 2026. Both versions maintain the 2017 tax cuts, both seek unspecified spending reductions and while each has a different price tag, my take is this process will be completed before too long. It would truly be miraculous if Congress actually submitted department spending bills on a timely basis, rather than the omnibus bills that have been the norm for quite a while. That would be true progress in how the government works.

Anyway, let’s see where things stand this morning. The one thing we know is that despite President Trump’s constant discussion on tariffs, market participants were not prepared. Ironically, yesterday saw modest gains in US equity indices but as of now (6:40) US futures are sharply lower (NASDAQ -3.8%, SPX -3.6%, DJIA -2.6%). Of course, the damage has been significant everywhere with equities lower worldwide.

In Asia, Vietnam (-7.2%) was the worst hit index, actually the worst in the world, as tariffs there rose to 46%. Given Vietnam has been a way station for exports from China to the US, I expect that we will see some swift action by the government there to address the situation. But elsewhere in Asia, while the losses were universal, they were not as bad as might be expected. Tokyo (-2.6%) led the way lower with Chinese shares (Hang Seng -1.5%, CSI 300 -0.6%) also falling, but not collapsing. Korea (-0.8%) and India (-0.4%) fell but were also not devastated.

In Europe, though, the pain is more consistent and larger, net, than Asia as per the below snapshot from Bloomberg. This will be the most interesting thing to watch as there has been a great deal of huffing and puffing about a response, but will European nations, who sell a great deal into the US, risk a worse outcome, or will they reduce their own tariffs?

Something else that has declined sharply is bond yields around the world. Treasury yields are lower by a further -6bps, and that is the basic decline seen across Europe as well. Asia saw even greater drops in yields with JGB’s (-12bps) breaking the trendline that had been in place since the BOJ first started hiking rates last year and Governor Ueda made clear his intention to continue to do so.

Source: tradingeconomics.com

It appears that investors are anticipating a global recession, at least based on the movements in government bond yields around the world.

In the commodity space, oil (-4.7%) has reversed much of its recent gains as the recession narrative has eclipsed the Iran war/sanctions narrative. However, despite the sharp decline, oil remains nearly $3/bbl above the lows seen at the beginning of March, just one month ago. In the metals market, gold, which initially traded to new highs on the tariff announcement reversed course about lunchtime in Asia and is now down by more than -2.0%. My take is this is a short-term impact as investors sell liquid assets with gains to cover margin calls, rather than any negative feelings about gold in the wake of the news. Instead, I suspect that the barbarous relic will regain its footing shortly as the ultimate haven asset in difficult times, and clearly many now see difficult times ahead. Silver (-3.9%) and copper (-0.4%) are also softer, much more on the economic concerns than the risk concerns.

Finally, the dollar, shockingly, is broadly lower this morning. While we have been consistently informed that a very clear response to the US imposing tariffs would be other currencies weakening vs. the dollar to offset the impact, apparently that model is also broken. Versus it’s G10 counterparts, the dollar is under severe pressure today. EUR (+1.75%), JPY (+1.7%), CHF (+2.1%), SEK (+2.1%) and even NOK (+1.1%) despite the collapse in oil prices, have all moved to within 1% of the dollar’s lows seen last September. But to keep things in perspective, I don’t know that I would call the dollar “weak” here. The below chart of DXY shows that even over the past 20 years, the dollar has been MUCH lower and only spent a relatively small amount of time above current levels.

Source: Koyfin.com

Interestingly, other than the CE4, which track the euro closely, most EMG currencies have not seen the same boost vs. the dollar, although most are somewhat higher. MXN (+0.6%), KRW (+0.6%) and INR (+0.5%) have all gained modestly. ZAR (0.0%) and CNY (-0.2%) are the only currencies that have bucked the trend and followed the economic theory.

Turning to the data, this morning brings the weekly Initial (exp 225K) and Continuing (1860K) Claims as well as the Trade Balance (-$123.5B) at 8:30. Then at 10:00 we see ISM Services (53.0). The thing about this data is it ought to have no impact whatsoever as last night’s tariff announcements completely changed the playing field. So whatever things were, they are not representative of the future, at least the near future. There are also a couple of Fed speakers, but again, there is no way they can determine how they will react until the real economic effects of these tariffs start to play out.

There have been many analysts who continue to believe that President Trump will not be able to tolerate a substantial decline in the equity market despite the fact that he has not discussed it at all, and he, along with Treasury Secretary Bessent have consistently said their goal is a lower yield on 10-year Treasuries. Well, they are getting their wish right now, regardless of the reason.

The president has done virtually everything he said he was going to do regarding the border, government efficiency and now tariffs. There are many skeptics who believe that he is out to force economic change on the backs of the bottom 90% of earners to benefit himself and others in the top 1%. But he has consistently said his goal is to help the middle class. His view of reindustrialization and more self-sufficiency while reduced international adventures continues to be the driving force of his policies. There is no reason to believe he is going to change that view. Do not look for a reversal of what he has done simply because the S&P 500 declines. I think the trend is going to be for the dollar to continue to decline along with interest rates, while commodities rally. Equity markets are going to be a tale of two markets, likely with previous highflyers suffering and previously overlooked companies benefitting.

The world is changing a lot, so the best thing you can do is maintain your hedges to mitigate the impact.

Good luck

Adf

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fxpoetry

Explaining the rhyme and rhythm of the FX markets each day

Tag Archives: #riskoff

Under Real Threat

Stroke of a Pen

Heartburn

Struggling…Juggling

Set Cash On Fire

This is the End

End of Days

Hair All on Fire

Squealed Like Stuck Pigs

Quite Miffed