Tag Archives: #riskon

Warnings Arise

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The headline today is ‘bout peace
In Gaza, and hostage release
Can this program last?
And both sides hold fast?
Or once more will violence increase?
 
Now, turning to markets we see
Risk assets continue their spree
But it’s no surprise
More warnings arise
That markets shun reality

 

In what can only be described as a monumental breakthrough in the Middle East, a peace plan between Israel and Hamas has been agreed that will see to the release of the remaining hostages and the disarmament of Hamas fighters while the Israeli army pulls back to specified lines near the border.  The idea is that a group of Arab nations will oversee the Gaza strip with funding coming from the Saudis, amongst others, and it appears this may be the best chance for peace in the area in centuries if not millennia.  President Trump has orchestrated this and deserves enormous credit for a truly momentous outcome.  I certainly hope the plans are fulfilled and we can remove one historical warzone from the map.  While this has had no immediate market impact, its importance is such that it cannot be ignored IMHO.

Ok, let’s move to the markets. Stocks, gold and the dollar continue to rally, continuing the conundrum that we have observed for the past several weeks.  However, my take is there has been an increase in the number of warnings that the end is nigh.  For instance, Bloomberg has a headline article about Nassim Taleb, the author of Black Swans, explaining that a debt crisis is looming and you need to hedge against that outcome.  As well, all over my XFin feed, I continue to see comments about how the end is nigh with respect to the equity market rally as the debt situation is going to soon overwhelm everything.

And I understand this concept well (and have been carrying Index put options for a while accordingly) but thus far, the mooted equity market collapse seems to be awaiting the mooted recession that has also yet to arrive.  The government shutdown has had essentially no impact on markets, perhaps improving them given the lack of data that tends to cause significant gyrations.  The Russia/Ukraine war is just background noise to markets at this point and the one thing that remains constant is that money supply continues to grow around the world with the result that both asset prices and high street prices rise.  In other words, governments around the world are ‘running it hot’ and will continue to do so for as long as they can.

The FOMC Minutes were released yesterday, and they explained what we already knew based on the dot plot (shown below), there is a wide dispersion of views on the committee.

Perhaps the most interesting thing is that despite there being a pretty even split between those expecting two more rate cuts this year and those expecting no more rate cuts this year, the Fed funds futures market is still pricing a 95% probability for a cut at the end of this month and a 79% probability for a second cut in December as per the below CME table.

As well, given the absence of recent data, the Fed speak is not coalescing around a single narrative so that dot plot is still our best estimate of what FOMC members are thinking, i.e. there are 17 independent views right now.

I understand the concerns which range from an incipient debt crisis to the risks that stem from AI and AI investment representing virtually all economic growth right now to the exclusion of almost all other economic sectors.  But markets are going to do what markets are going to do, and right now, the bears are having a tough time making their case.  

Remember, timing is everything in life, and in markets being early is effectively the same as being wrong unless one has significant ability to withstand drawdowns.  There are certainly signs around of the beginning of the unraveling (sudden bankruptcies of large firms like Tricolor and First Brands; SOFR spreads widening; difficult Treasury auctions, etc.).  For now, there is no obvious catalyst to change the recent direction of travel, but markets don’t need a specific catalyst, sometimes it is just time to change.  This is why hedging matters.

Ok, let’s recap how things played out overnight.  After more record closes for the S&P 500 and NASDAQ, Tokyo (+1.8%) exploded higher again on the back of more AI related news.  China (+1.5%) opened higher after its one-week hiatus although HK (-0.3%) lagged.  The news on the mainland appears to be some optimism regarding the upcoming Trump-Xi meeting.  Korea remains closed although India and Taiwan both had positive sessions, which given the tech focus there should not be surprising.  Elsewhere it was mostly modest gains although the Philippines saw a decline despite the central bank cutting rates in a surprise move.

I fully admit I no longer understand the reaction function in European shares as the DAX (+0.3%) continues to rally despite one dire economic report after another.  This morning Germany released trade data showing both exports (-0.5%) and imports (-1.3%) fell far more than expected which given the declines indicates a complete lack of growth, if not shrinkage.  Too, the CAC (+0.2%) is modestly higher as the French are going to try to get another PM to pass a budget, although I am skeptical.  However, the rest of Europe is modestly softer this morning.  As to US futures, at this hour (7:00), they are essentially unchanged.

In the bond market, yields are basically unchanged across the board, with French OATs the best performers (-2bps) on the positive political news.  While we have definitely seen an uptick in commentary about the unsustainable debt story in the US over the past month, market participants don’t seem to be reading those stories.  A quick look at the chart below shows that we have spent the bulk of the time of the last month with 10-year Treasury yields trading between 4.05% and 4.15%, hardly a sign of crisis.

Source: tradingeconomics.com

On the commodity front, oil (-0.5%) continues to trade within the middle of its recent range and is just not very interesting right now.  Metals, however, remain the focus and while gold (0.0%) is unchanged consolidating at its new highs, we see silver (+1.65%, and just 35¢ from $50/oz), copper (+2.3%) and platinum (+1.6%) all continuing their recent rallies.

Finally, the dollar continues to rally as well with the euro (-0.2%) looking a lot like it is going to trade below 1.16 soon.  Remember, it wasn’t that long ago when the “consensus” view was it was going to trade to and through 1.20!  The pound (-0.3%) is slipping and JPY (-0.1%) while not moving much so far today, is just below 153 and shows no signs of stopping its recent decline (dollar rally).  The Scandies are weak, CLP (+0.4%) is benefitting from copper’s rise and overall, the DXY is now above 99.00 and looking like 100.00 is just a matter of days away.

Arguably, the biggest news this morning is Chairman Powell speaking at the Community Bank Conference in Washington, but given the venue, I have a feeling we will not hear very much of note regarding monetary policy.  

The current correlations seem to be holding, so higher stocks and higher metals lead to a higher dollar, although it is not clear that is the causation route.  Perhaps it is demand for those dollar-denominated instruments is driving dollar demand.  But I don’t see a reason for it to change for now.  Risk is still there, and hedging still matters, don’t forget that, but enjoy the ride!

Good luck

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The Chaos Extant

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Though yesterday equities fell
The trend that most pundits foretell
Is higher and higher
As AI’s on fire
And it would be crazy to sell
 
And, too, precious metals keep soaring
A sign of investors abhorring
The chaos extant
Which serves as a taunt
To those who prefer markets boring

 

My friend JJ (Alyosha at Market Vibes on Substack) made a very interesting point about recent markets, which I have felt, but not effectively articulated until he pointed it out; the correlation of pretty much all markets is approaching one, but they are rallying.  Historically, every market has its own drivers and tends to trade somewhat independently of other markets, at least across asset classes.  While it is certainly common to see equity indices rise and fall together, we have all become used to bond markets moving in the opposite direction while commodity and FX markets tend to follow completely different drummers.  After all, while there are certainly big unifying themes, each of these markets, and the components that make them up, all have idiosyncratic drivers of price.

Again, historically, the only time this changes is when there is a crisis, at which point the correlation between markets tends to one (or minus one) as panic selling of risk assets and buying of perceived havens becomes the ONLY trade of interest.

However, what we have observed over the past several weeks is that virtually all risk assets are rising simultaneously, with equities, gold and bitcoin all on a tear as you can see below.

Source: tradingeconomics.com

In other words, their correlations are approaching one.  The odd thing about this is that equity markets tend to reflect expectations for the future of economic activity along the following line of reasoning; strong economic growth leads to strong earnings leads to higher equity prices.  At least that has been the history.  Meanwhile, gold, and more recently bitcoin, have served as the antithesis of that trade, increasing concern over weaker economic outcomes which results in increased demand for haven assets that can buck that trend.  

Of course, historically there has been another asset class seen as protection, bonds, but those are in a tough spot right now as the ongoing massive increases in issuance by countries all over the world has investors somewhat concerned about their safety.  This has been especially true in Japan, where JGB yields last night traded to their highest level since 2008 at 1.70%.

Source: marketwatch.com

But my observation is that investors elsewhere are uncertain how to proceed as yields, though higher than seen several years ago, are not increasing dramatically despite the narrative of fiat debasement, increased inflation and major fiscal problems building around the world.

Source: tradingeconomics.com

The explanation that makes the most sense to me is the concept that governments around the world are going to ‘run it hot’ as they seek faster economic growth at the expense of all else and will only pay lip service to trying to fight inflation.  The result is fiscal spending will continue to prime the pump, whether on purely domestic issues or things like defense, debt issuance will tend toward shorter dates as there is a much greater appetite for T-bills than bonds given the inflation concerns, and so stock markets will benefit, but perceived inflation hedges like gold and bitcoin, will also benefit.  (At this point, I will insert a plug: If you want to protect against inflation, at least against CPI’s rise, while maintaining liquidity, USDi, the only inflation tracking cryptocurrency is a very good idea for some portion of your portfolio.  Check out http://www.USDicoin.com).

The concern about this entire story is that when things change, and they always do at some point, all these assets that are rising in sync will fall in sync, and remember, falling markets tend to move a lot faster than rising ones.  I’m not saying this is imminent, just that the setup feels concerning, at least to my eyes and my gut.

Meanwhile, let’s look at how markets behaved overnight.  Yesterday saw US equity markets slip a bit, although they closed well off their early morning lows and futures this morning are pointing higher by a small amount, 0.2%.  Asian markets saw Japan (-0.5%) and HK (-0.5%) both slide as well, following the US while China remained closed for the holiday but will reopen this evening.  Elsewhere in the region, for those markets that were open (Australia, India, Taiwan were the majors) modest weakness was also the story.  

Europe, though, is a bit of a conundrum as it is having a very positive session (UK +0.9%, Germany +0.7%, France +0.8%, Spain +0.6%) despite the fact that data there continues to disappoint (German IP -4.3%) which as you can see from the below chart continues a three year run of pretty horrible outcomes.

Source: tradingeconomics.com

As well, France has no government, and the UK government is seeing its support erode dramatically.  But looking at the ECB, there is no expectation priced into the market for further rate cuts, so I am baffled as to why European equity markets are performing well.  

Perhaps it is because the dollar is strengthening, which is the recent trend with the euro slipping another -0.25% overnight and trading back to its lowest level in a month.  Too, the pound (-0.2%), CHF (-0.2%) and JPY (-0.6%) have all suffered pushing the DXY up toward 99.00.  Does a strong dollar help foreign markets?  I always thought the story was it hurt them as funding USD debt became more difficult for foreign companies.  Something doesn’t make sense here.  As to EMG markets, they are also seeing their currencies slip, mostly in a similar fashion to the euro, down about -0.2%, although KRW (-0.6%) is the laggard as they have been unsuccessful in getting any tariff relief from President Trump.

Finally, commodity prices continue their remarkable rally, at least metals prices are on a remarkable rally with gold (+1.3% or $50/oz) and silver (+2.5%, now at $49/oz) driving the bus and taking copper (+0.7%) and platinum (+1.8%) along for the ride.  While gold has rallied more than 53% so far this year, it has not been a US investor focus until recently.  I think it has further to run, a lot further.  As to oil (+1.5%), it continues to bounce from last week’s lows but remains well within its recent trading range.  Ukrainian attacks have been successful in reducing Russian output and OPEC+ only raised production by 137K barrels at their last meeting, less than had been rumored.  However, as I observe this market, it needs a large external catalyst to breech the range in my view, and if war doesn’t do the job, I’m not sure what will.

And that’s really it for the day.  Government data remains on hiatus and even though Fed speakers are polluting the airwaves, nobody is listening.  The government has been shut down for a week, and I think that most people just don’t care.  In fact, if the result was less government expenditure for less government service, I think many would make the tradeoff.  The upshot is, the larger trend of equity and commodity rallies remain in place, and the dollar continues to look a lot better than most other fiat currencies.

Good luck

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Who Will Blink First?

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The question’s now, who will blink first?
With Democrat leaders immersed
In internal strife
Concerned their shelf life
Is short and their party’s been cursed
 
Or will the Republican leaders
Start caring if New York Times readers
Scream loudly enough
The polls will turn rough?
My bet’s on the Dems as conceders

 

So, the government is shut down and yet, the sun continues to rise and set, and life pretty much goes on as before.  Is this, in fact a big deal?  It all depends on your point of view, I suppose.  It is certainly a big deal for those furloughed government employees, especially those whose jobs may disappear in the pending RIF.  But as I have often said, if they leave government and become baristas at Starbucks, they are almost certainly adding more value to the economy.  And consider, whenever you have to interface directly with the federal government (post office, passports, IRS, etc.) has the customer service ever been useful or effective?  Explaining that people will have to wait longer is hardly a compelling argument.  In fact, of all the places where AI is likely to be most useful, repetitive government tasks seems one of the most beneficial potential applications.

Nonetheless, this is the story that is going to lead the headlines for a few more days.  Ultimately, as we have already seen several Democrat senators vote to pass the CR, I expect enough others to do so to reopen the government, if not at the next scheduled vote tomorrow, then at the one following next week.  Ultimately, I believe what we’ve relearned is that most politics is simply performance art.

Too, remember that the decision as to who is considered essential, when the government shuts down, is left up to the president.  So, the Democrats shut down the government and have allowed President Trump to decide what gets done.  Pretty soon, I suspect they will figure out that was a bad idea as we have already seen specific projects in NY (home to both House and Senate minority leaders) get halted with the funds flows stopping as well.

Meanwhile, in the markets, nobody appears to have noticed that the government has shut down.  That is the key conclusion to be drawn from the continuation of the equity market rally where all three major US indices closed at record highs yet again. I am hard pressed to look at the below chart of those indices and glean any concern by markets regarding the government shutting down.  Perhaps, even, they are applauding the idea as it means less spending!

Source: tradingeconomics.com

Arguably, the market’s biggest concern is that government data releases will be missing from the mix, although, that too, might be a blessing.  The person most upset there will be Ken Griffin, as Citadel’s algorithms will not be able to take advantage of the data prints before everyone else!  In fact, I suspect that he is already bending the ears of the Democratic leadership to get things back to normal.

Meanwhile, would it be too much to ask to close the Fed during the shutdown?  Asking for a friend!

Ok, what is happening elsewhere in the world.  Japanese Tankan data the night before last came in a tick weaker than forecast, and than last month, but remains solid overall.  Deputy BOJ Governor Uchida reiterated that if the economy performs as currently expected, the BOJ will continue to remove policy accommodation going forward with expectations for a rate hike at the end of the month priced at a 60% probability.  Interestingly, despite that, the Nikkei (+0.9%) rallied overnight along with the yen (+0.3% overnight, +2.1% in the past week), although the yen move makes more sense.  As to the rest of Asian equity markets, China (+0.5%) and HK (+1.6%) are clearly unperturbed by the US situation as a positive outlook on trade talks with the US are the narrative there heading into their weeklong National holiday.  Elsewhere in the region, every major bourse is higher with some (Korea +2.7%, Singapore +1.7%) substantially so.  The US rally is dragging along the world.

This is true in Europe as well with the DAX (+1.4%) and CAC (+1.3%) leading the way as all major bourses rise alongside the US.  Apparently, increasing global liquidity is good for risk assets.

In the bond market, Treasury yields continue to slide, down another -1bp overnight after slipping -4bps yesterday.  The only data was the ADP Employment Report which showed a decline of -32K jobs compared to expectations of +50K.  It is important to recognize that this report included ADP’s benchmark revisions which, not surprisingly, resulted in fewer jobs create last year just like the QCEW showed with the NFP report two months’ ago.  This data took the probability of a Fed cut at the end of the month up to 99% and pushed the probabilities for cuts next year higher as well.

Source: cmegroup.com

Of course, this is the very definition of bad news is good for equities and bonds, as there continues to be a strong expectation that rate cuts are designed to support asset prices rather than address real weakness in the economy.  And in a way, this makes sense.  After all, the Atlanta Fed’s GDPNow forecast for Q3 is currently at 3.8%, hardly the sign of an impending recession.

So, stronger than long-term growth and rate cuts seem an odd policy pairing, but the stock markets love it!

The other markets that love this policy are precious metals which continue to make new highs as well, for gold (+0.5%) these are all-time highs, for silver (+0.3%) they are merely 14-year highs.  But the one thing that is clear (and this is true of platinum and palladium as well) is that investors are starting to look at the current policy mix and grow concerned over the value of fiat currencies.  Oil (-0.7%), though, is currently on a different trajectory, trading right back to the bottom of its months’ long trading range less than a week after touching the top.

Source: tradingeconomics.com

There seems to be a difference of opinion regarding future economic activity between equity and oil markets.  I have read a number of analyses describing peak oil, yet again, although this time they are calling for peak demand, not peak supply.  Given that fossil fuels continue to generate more than 80% of global energy, and that oil also is the base for some 6000 products utilized around the world in everyday applications and the fact that there are some 7 billion people who are energy starved compared to the Western nations, I find the peak demand story to be hard to accept.  But that’s just me and I’m an FX guy, so what do I know?

Speaking of FX, the decline in yields and growing belief in easier US monetary policy has worked its way into the dollar, pushing it a bit lower, about -0.15% based on the DXY.  But looking across both G10 and EMG currencies, the yen’s 0.3% move describes the maximum gain with the rest having either gained less or declined a bit.  Right now, the dollar doesn’t appear to be the focus of the macro world, although that is certainly subject to change at a moment’s notice.

We know there is no government data coming, although apparently, the Treasury is still auctioning T-bills today, that activity will not be delayed!  We also hear from Dallas Fed President Logan, someone who ostensibly has been mooted as a potential next Fed chair.  Again, the one thing we know about the FOMC right now is that there is no consensus opinion on what to do next, at least based on the dispersion of the dot plot from the last meeting.

While the Trump administration may be getting ready to axe a lot of Federal jobs, that will not stop the liquidity impulse.  It’s not that this government is going to spend less, it is just spending money on different priorities.  But running it hot is clearly the MO for now and the foreseeable future.  Ultimately, if the GDPNow forecast is correct, a much weaker dollar seems unlikely regardless of the Fed’s moves.  But that doesn’t mean a dollar rally, rather we could stay near here for a lot longer.

Good luck

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No Reprieve

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

 

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

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

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

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

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

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

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

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

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

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

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

Source: tradingeconomics.com

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

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

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

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

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

Good luck

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Markets Ain’t Scared

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So, NFP data was wrong
Which many have said all along
Perhaps it was proper
For Trump to just drop her
Creating McTarfer’s swan song
 
Remarkably, though, no one cared
And equity markets ain’t scared
While Treasury yields
Edged higher, it feels
That 50bps is now prepared

 

Like a dog with a bone, I cannot give up the NFP story even though the market clearly didn’t care about the adjustment or had fully priced it in before the release.  In fact, it seems investors, or algos at least, welcomed the fact that the number was so large as it seems to make the case for a 50 basis point cut next week that much stronger.  Certainly, Chairman Powell will have difficult saying that starting a cut cycle with 50bps would be inappropriate given his more politically driven efforts a year ago.

But one final word on this subject is worthwhile I believe, and that is; why does the market pay so much attention to this particular data point?  Consider the following:  according to the BLS, current total employment in the US is approximately 159,540,000.  In fact, that number has been above 150 million since January 2019, although Covid managed to impact that for a few months before it was quickly regained.  

Now, NFP has averaged ~125K since they started keeping records in 1939 with a median reading of 160K.  To modernize the data, since 2000 it has averaged ~93K with a median of 154K.  Consider what that means with respect to the total labor force.  Ostensibly, the most important economic data point of each month represents, on average, 0.06% of the working population.  Additionally, that number is subject to massive revisions both on a monthly basis, and then, as we saw yesterday, there is another annual revision.  I don’t know if Ms. McEntarfer was good at her job or not, but it is not unreasonable to consider that the payrolls data, as currently calculated, does not really represent anything other than statistical noise.   I prepared the below chart to help you visualize how close to zero the NFP number is relative to the working population.  Absent the Covid spike, I would argue that the information that this datapoint delivers, especially in the past 25 years, also approaches zero.

Data FRED database, calculations @fx_poet

You may recall the angst with which the firing of Ms McEntarfer was met, and given President Trump’s penchant for overstating certain things, it certainly had a bad look about it.  But the evidence seems to point to the fact that the data is not only suspect, given its revision history, but essentially inconsequential relative to the economy.  The fact that the Fed is making policy decisions based on changes in the economy that represent less than 0.1% of the working population, and half that amount of the general population, may be the much larger scandal here.  

Remember, a 4th Turning is all about tearing down old institutions because they no longer are fit for purpose and building new ones to gain trust.  Perhaps NFP as THE monthly number is an institution whose time has passed, and investors (and the Fed) need to find other data to help them evaluate the current economic situation.  Of course, the algos love a single number to which they can be programmed and respond instantaneously, so if NFP loses its cachet, and algos lose some of their power, it would be better for us all, except maybe Ken Griffin and Larry Fink!

Otherwise, the overnight market offered very little new information.  Chinese inflation data continues to show an economy in deflation with the Y/Y result of -0.4% being worse than expected and the 5th negative outcome in the past seven months.  Looking at the chart below, it is becoming clearer that President Xi, despite flowery words about consumption, has no idea how to stimulate domestic activity other than the mercantilist model to which China subscribes.  Now, they overproduce stuff and since the imposition of higher tariffs by the US on Chinese goods, it seems more of that stuff is hanging around at home and driving prices down.  Alas, it seems not enough Chinese want the things they manufacture, hence steadily declining prices.  While it is a different problem than in the US, it is a problem nonetheless for President Xi.

Source: tradingeconomics.com

And with that, let’s head to the market activity.  Yesterday’s US rally was followed by strength all around the world as it appears everybody is excited about the prospects of the FOMC cutting rates by 50bps next week. While the Fed funds futures market has barely moved, currently pricing just an 8.2% probability of that move, I am hard pressed to conclude that the rest of the economic and earnings data is so good that equities should be rallying for any other reason.

Anyway, Japan (+0.9%), China (+0.2%), HK (+1.0%), Korea (+1.7%), India (+0.4%) and Taiwan (+1.4%) are pretty definitive proof that everybody is all-in on a 50bp cut by the Fed.  In fact, the worst performer in Asia, Thailand (0.0%) was merely flat on the day.  Turning to Europe, here, too, green is today’s color with Spain (+1.3%), France (+0.6%), Germany (+0.2%) and the UK (+0.5%) all rising nicely.  Domestic issues, which abound throughout Europe, are inconsequential this morning.  and don’t worry, US futures are higher by 0.35% this morning as well.

In the bond market, while yields edged up yesterday a few basis points, this morning they are essentially unchanged across the board in the US, Europe and Japan.  Worries about excessive deficits have been set aside.  A major protest in France today is not impacting markets at all.  Word that the BOJ will consider tightening policy (as if!) despite the political uncertainty has had no impact.  Perhaps we have achieved that long sought equilibrium in rates! 🤣

In the commodity space, oil (+1.1%) rallied after the Israeli attempt to eliminate Hamas leadership in Qatar yesterday ruffled many feathers and was seen as a potential escalation in Middle East conflicts.  But, at $63.30/bbl, WTI remains firmly in the middle of its recent trading range as per the below chart.

Source: tradingeconomics.com

But you know what is not in the middle of its trading range, in fact the only thing with a real trend right now?  That’s right, gold.  A quick look at the below chart from tradingeconomics.com helps you understand why so many market pundits, if not investors, are excited about continued gains here.  Calls for $4000/oz and more by early next year are increasing.  As to the other metals, silver and platinum are following gold higher this morning although copper is unchanged.

Finally, the dollar is little changed vs. most major currencies with the euro and pound having moved 0.1% or less than the close and the same with JPY, CAD, CHF and MXN.  In fact, the biggest mover this morning is NOK (+0.5%) which on top of oil’s rally has benefitted from still firm inflation encouraging the idea that the Norges Bank is going to raise rates when they meet next Thursday.  If they hike after the Fed cuts 50bps, the krone will likely see further strength, at least in the short run.

On the data front this morning, PPI (exp 0.3%, 3.3% Y/Y; 0.3%, 3.5% Y/Y core) is the key release and then the EIA oil inventory data is released at 10:30 with a modest draw expected.  As we remain in the quiet period, no Fed speakers are slated, so the algos will have to live with the PPI data or any other stories they can find.

If the inflation data this week stays quiescent, I think 50bps is likely next week as the employment situation, despite my comments above, will still be seen in a negative light and I think Powell will feel forced to move.  Plus, if Stephen Miran is added to the board this week, there will be increased pressure for just such an outcome.  However, while a Fed aggressively cutting rates should be a dollar negative, I feel like that is becoming the default view, so maybe not so much movement from here.  We need another catalyst.

Good luck

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Crab Bisque

Posted on by

Though troubles worldwide haven’t ceased
Investors continue to feast
On assets with risk
As if they’re crab bisque
And appetites all have increased
 
Perhaps they believe peace is near
Or maybe they’re just cavalier
‘Cause Bitcoin has rallied
And profits they’ve tallied
Convinced them they’ll have a great year

 

This poet is a bit confused this morning as I watch ongoing record high equity markets in the US and elsewhere indicate a bright future, but I continue to read about the problems around the world, specifically in Ukraine and Gaza, but also throughout Africa, as well as the apparent end of democracy in the US.  Though it is showing my age, I recall during the Reagan presidency, equity markets performed well amid a sense that the world was going in the right direction.  The Cold War ended and Fed Chair Volcker had shown he had what it took to fight inflation effectively.  This combination was very effective at brightening one’s outlook on the future.

Then, leading up to the dotcom bubble, attitudes were also remarkably positive as the future held so many possibilities while peace had largely broken out around the world.  Again, the rally albeit overdone, at least had a basis that combined financial hopes with a positive geopolitical background.  Of course, the events of 9/11 put the kibosh on that for quite a while.

Leading up to the GFC, though, I would contend that the zeitgeist was a bit different, and while housing markets were on fire, the geopolitical picture was far less rosy with Russia reasserting itself and taking its first piece of Ukraine, the Middle East situation much dicier with the ongoing military action in Iraq and Afghanistan, and China beginning to flex its muscles in the South China Sea.

Of course, the similarity to these times is they all ended with significant equity market declines and resets of attitudes, at least for a while as per the below chart of the S&P 500.  Of course, given the exponential move over time, the early dips don’t seem so large today, although I assure you, on October 19, 1987, when the DJIA fell 22.6%, it seemed pretty consequential on the trading desk.

Source: finance.yahoo.com

But today, I find the disconnect between market behavior and global happenings far harder to understand. Yes, there is a prospect that Presidents Trump and Putin will agree a ceasefire tomorrow when they meet in Alaska, although I’m not holding my breath for that.  At the same time, President Trump is doing his best to reorder the global economic framework, and doing a pretty good job of it, but causing significant dislocations around the world with respect to trade and finance.  Too, through all the other bubbles, consumer price inflation was not a concern of note, with CPI remaining quiescent throughout until the Covid response as per the below and, as Tuesday’s core CPI reminded us, inflation remains a specter behind all our activities.

And yet, all-time highs are the norm in markets these days, whether US equities, Japanese equities, European equities, Bitcoin or gold, prices for financial assets remain in the uppermost percentiles of their historic ranges.  Perhaps this is the YOLO view of life, or perhaps markets are telling us the technology futurists are correct, and AI will bring so much benefit to mankind that everything will be better.  Or…maybe this is simply the latest bubble in financial markets, and that permanently high plateau for asset values, as Irving Fisher explained in October 1929, is once more a mirage.  Is the value of Nvidia, at $4.466 trillion, really greater than the economic output of every nation on earth other than the US, China and Germany?  It is a comparison of this nature that has me concerned over the short- and medium-term prospects, I must admit.

However, the valuations are what they are regardless of any logic or financial comparisons.  If the Fed cuts 50bps in September, which as of now would be a huge surprise to markets based on pricing, would that really increase the value of these companies by that much?  Perhaps, as frequently has been the case, Shakespeare was correct and “something is rotten in the state of Denmark.”  Care must be taken with regard to owning risk assets I believe, as a correction of some magnitude seems a viable outcome by the end of the year.  At least to my eyes.  Just not today.

Today, this is what we’ve seen in the wake of yesterday’s ongoing US equity rally.  Tokyo (-1.45%) slipped on what certainly looked like profit-taking after reaching new highs.  China was little changed but Hong Kong (-0.4%) fell ahead of concerns over Chinese data due this evening and the idea it may not be as strong as forecast.  As to the rest of the region, the larger exchanges, Korea and India, were little changed and the smaller ones were mixed, all +/- 0.5%.  In Europe, gains are the order of the day, at least on the continent (DAX +0.5%, CAC +0.35%, IBEX +0.8%) although the FTSE 100 (0.0%) is struggling after mixed data showing stronger than expected GDP but much weaker than expected Business Investment boding ill for the future.  As to US futures, they are little changed at this hour (7:30).

In the bond markets, Treasury yields (-3bps) continue to grind lower as comments from Treasury Secretary Bessent have encouraged investors that interest rates will be declining across the curve.  Teffifyingly, there is a story that President Trump is considering Janet Yellen as the next Fed Chair, something I sincerely hope is a hoax.  European sovereign yields are lower by -1bp across the board but JGB yields (+3bps) are rising after Bessent basically said in an interview that the Japanese needed to raise rates to support the yen!

In commodities, oil (+0.4%) is stabilizing after several days of modest declines, but the trend of late remains lower.  If peace breaks out in Ukraine, I suspect the price will have further to fall as the next step will be the reduction or ending of sanctions on Russian oil.  Meanwhile, the metals markets are little changed to slightly softer this morning after a modest rally yesterday as a stronger dollar and a general lack of interest are evident.

As to that dollar, only the yen (+0.4%) is bucking the trend of a stronger dollar today although the pound is unchanged after the data dump there.  But the rest of the G10 is weaker by between -0.2% and -0.4% which is also a pretty good description of the EMG bloc, softer by those amounts.  It’s funny, once again this morning I read some comments about how the dollar’s decline in the first half of this year, where it has fallen about -10%, is the largest since the 1970’s, as though the timing within the calendar is an important part of the dollar’s value.  While I would guess that Bessent is conflicted to some extent, I believe the administration is perfectly happy with a decline in the dollar if it helps US export competitiveness as long as inflation remains under control.  Of course, that is the $64 thousand (trillion?) dollar question.

On the data front, this morning brings the weekly Initial (exp 228K) and Continuing (1960K) Claims as well as PPI (Headline 0.2%, 2.5% Y/Y and Core 0.2%, 2.9% Y/Y).  I always find that there is less interest in PPI when it is released after CPI, but a surprise, especially a hot surprise, could well impact some views.  Once again, we hear from Richmond Fed president Barkin, although so far all he has told us is he is the quintessential two-handed economist, so I’m not expecting anything new here.

Personally, I am getting uncomfortable with equity market valuations and levels based on the rest of the things ongoing and sense a correction in the offing.  As to the dollar, I suspect if I am correct, the dollar will benefit alongside bonds.  Otherwise, the summer doldrums seem likely to describe the day.

Good luck

Adf

Lest ‘Flation Has Spice

Posted on by

The market absorbed CPI
And equities started to fly
Though Core prices rose
T’was Headline, I s’pose
Encouraged investors to buy
 
As well, Fed funds futures now price
The Fed will cut rates this year thrice
The upshot’s the buck
Is down on its luck
Beware though, lest ‘flation has spice

 

Core prices rose a bit more than forecast in yesterday’s CPI report although the headline numbers were a touch softer.  The problem for the Fed, if they are truly concerned about the rate of inflation, is that the strength of the numbers came from core services less shelter, so-called Supercore, a number unimpeded by tariffs, and one that has begun to rise again.  As The Inflation Guy™ makes clear in his analysis yesterday, it is very difficult to look at the data and determine that 2% inflation is coming anytime soon.  I know the market is now virtually certain the Fed is going to cut in September, but despite President Trump’s constant hectoring, I must admit the case for doing so seems unpersuasive to me.

Here are the latest aggregated probabilities from the CME and before you say anything, I recognize the third cut is priced in January, but you need to allow me a little poetic license!

However, since I am just a poet and neither institutions nor algorithms listen to my views, the reality on the ground was that the lower headline CPI number appeared to be the driver yesterday and into today with equities around the world rallying in anticipation of Fed cuts.  As well, the dollar is under more severe pressure this morning on the same basis.  However, it remains difficult for me to look at the situation in nations around the world and conclude that the US economy is going to underperform in any meaningful way over time.  

So, to the extent that a currency’s relative value is based on long-term economic fundamentals, it is difficult to accept that the dollar’s relative fiat value will decline substantially, and permanently, over time.  I use the euro as a proxy for the dollar, which is far better than the DXY in my opinion as the Dollar Index is a geometric average of 6 currencies (EUR, JPY, GBP, CAD, SEK and CHF) with the euro representing 57.6% of the basket.  And I assure you that in the FX markets, nobody pays any attention to the DXY.  Either the euro or the yen is seen as the proxy for the “dollar” and its relative value.  At any rate, if we look at a long-term chart of the euro below, we see that the twenty-year average is above the current value which pundits want to explain as a weak dollar.  Too, understand that back in 1999, when the euro made its debut, it started trading at about 1.17 or so, remarkably right where it is now!

Source: finance.yahoo.com

My point is that the dollar remains the anchor of the global financial system, and given the current trends regarding both economic activity and the likely ensuing central bank policies, as well as the ongoing performance of US assets on a financial basis, while short-term negativity on the dollar can be fine, I would be wary of expecting it to lose its overall place in the world.

Speaking of short-term views, especially regarding central bank activities, it appears clear that the market is adjusting the dollar’s value on this new idea of the Fed cutting more aggressively.  If that is, in fact, what occurs, I accept the dollar can decline relative to other currencies, but I really would be concerned about its value relative to things like commodities.  And that has been my view all along, if the Fed does cut rates, gold is going to be the big beneficiary.

Ok, let’s review how markets have absorbed the US data, as well as other data, overnight.  Yesterday’s record high closings on US exchanges were followed by strength in Tokyo (+1.3%), Hong Kong (+2.6%), China (+0.8%) despite the weakest domestic lending numbers in the history of the series back to 2005.  In fact, other than Australia (-0.6%) every market in Asia rallied.  The Australian story was driven by bank valuations which some feel are getting extreme despite the RBA promising further rate cuts, or perhaps because of that and the pressure it will put on their margins.  Europe, too, is rocking this morning with gains across the board led by Spain (+1.1%) although both Germany (+0.9%) and France (+0.6%) are doing fine.  And yes, US futures are still rising from their highs with gains on the order of 0.3% at this hour (7:45).

In the bond market, Treasury yields have slipped -3bps this morning, with investors and traders fully buying into the lower rate idea.  European sovereigns are also rallying with yields declining between -4bps and -5bps at this hour.  JGBs are the exception with yields there edging higher by 2bps, though sitting right at their recent “home” of 1.50%.  as you can see from the chart below, 1.50% appears to be the market’s true comfort level.

Source: tradingeconomics.com

In the commodity space, oil (-0.6%) continues to slide as hopes for an end to the Russia-Ukraine war rise ahead of the big Trump-Putin meeting on Friday in Alaska.  Nothing has changed my view that the trend here remains lower for the time being as there is plenty of supply to support any increased demand.

Source: tradingeconomics.com

Metals, meanwhile, are all firmer this morning with copper (+2.6%) leading the way although both gold (+0.4%) and silver (+1.7%) are responding to the dollar’s decline on the day.

Speaking of the dollar more broadly, its decline is pretty consistent today, sliding between -0.2% and -0.4% vs. almost all its counterparts, both G10 and EMG.  This is clearly a session where the dollar is the driver, not any particular story elsewhere.

On the data front, there is no primary data coming out although we will see the weekly EIA oil inventory numbers later this morning with analysts looking for a modest drawdown.  We hear from three Fed speakers, Bostic, Goolsbee and Barkin, with the latter explaining yesterday that basically, he has no idea what is going on and no strong views about cutting or leaving rates on hold.  If you ever wanted to read some weasel words from someone who has an important role and doesn’t know what to do, the following quote is perfect: “We may well see pressure on inflation, and we may also see pressure on unemployment, but the balance between the two is still unclear.  As the visibility continues to improve, we are well positioned to adjust our policy stance as needed.”  

And that’s all there is today.  The dollar has few friends this morning and I see no reason for any to materialize today.  But longer term, I do not believe a dollar weakening trend can last.

Good luck

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Over the Hump

Posted on by

It’s beautiful and it’s quite big
Though more complicated than trig
But President Trump
Got over the hump
Though sans views that he is a Whig
 
As well, Friday’s Canada rift
Has ended, boy that was sure swift
Now, this week we’ll learn
If there’s still concern
‘Bout jobs, or if there’s been a shift

 

The weekend news revolves around the fact that the Senate has passed the BBB with a 51-49 vote, and it now moves to committee so both Houses of Congress can agree the final details before it gets to President Trump’s desk for signature and enactment.  This is another victory for the President, adding to last week’s wins and remarkably there have been several others as well.  The Supreme Court ended the ability of a single district court judge to injunct the entire nation based on a single case, a move that will prevent judges who disagree with the president from stopping his policy efforts.  Then, Canada announced they were going to impose a tax on US technology companies (the one that the Europeans just killed) and after Mr Trump ended the trade dialog quite vociferously, Canada backed down from that stance and is back at the negotiating table.

I mention this not to be political but as a backdrop to what is helping to drive the improved sentiment in US markets for both equities and bonds.  While a quick look at YTD performances of US equity indices vs. Europeans shows the US still lags, that gap is narrowing as the news cycle continues to point to positive things happening in the US.  Certainly, my understanding of the BBB is that it is quite stimulative, although it is changing priorities from the previous administration.

More interestingly, the Treasury market, which has been the subject of many slings and arrows lately from the part of the analyst community that continues to worry about refinancing the growing US debt pile, continues to behave remarkably well.  A quick look at the chart below shows that 10-year yields have been trending lower for the past 6 months, at least, and this morning are continuing that trend, slipping another -3bps.

Source: tradingeconomics.com

My point is that despite relentless doom porn regarding the economy, the big picture continues to point to ongoing growth in economic activity.  There are many anecdotes regarding the impending weakness, (the latest I saw was the increase in the number of credit card purchases that have been rejected is rising rapidly) and yet, the main data has yet to crack and roll over to point to a clear sign of significant slowing.  Perhaps this week when the NFP report is released on Thursday (Friday is July 4th holiday), we will see that long-awaited decline.  However, as of this morning, the Fed funds futures market continues to price just a 21% probability of a July rate cut as forecasts for NFP show the median to be 110K. 

While I completely understand the concerns that the doomers recite, I have come to understand that the idea of a recession is a policy choice, not a natural phenomenon.  While in the past, the business cycle was more powerful than the government, that is no longer the case.  Rather, what we have observed over the past 15 years at least, since the GFC and the onset of QE, is that the government has become a large enough part of the total economy to drive it at the margin.  And I assure you, if a recession is a policy choice, there is not a politician that is going to choose one.  Perhaps we will reach a point where the imbalances get beyond the control of the central banks and their finance ministries, but we are not there yet.

Ok, let’s take a peek at the overnight price action.  Despite all the spending promises by governments around the world, yields have slipped everywhere with all European sovereigns taking their lead from the US and lower this morning by -2bps to -3bps.  Even JGB yields (-1bp) have managed to decline slightly.  If inflation fears are building, they are not obvious this morning.

In the equity markets, Friday’s US rally was followed by most Asian bourses rising (Nikkei +0.8%, Australia +0.3%, China +0.4%) although HK (-0.9%) slipped after Chinese PMI data was released that indicated things weren’t collapsing, but that future monetary stimulus may not be coming after all.  The worst of both worlds for stocks.  Meanwhile, European exchanges are mostly a touch softer, but only on the order of -0.2%, so really very little changed amid light volume overall.  Interestingly, US futures are solidly higher at this hour (7:00), rising by 0.55% across the board.

In the commodity markets, oil (-0.35%) is slipping a bit, but is basically hanging around near its recent lows as the market remains unconcerned about an escalation of fighting between Iran and Israel and any possible closure of the Strait of Hormuz.  Meanwhile, gold (+0.4%) is bouncing from a weak performance Friday which appears to have been a bit oversold, although copper and silver are not following suit this morning with the former (Cu -0.7%) the laggard.  However, all the metals remain sharply higher this year and in strong up trends.

Finally, the dollar is modestly softer again this morning with KRW (+0.9%) the biggest mover, by far, while the entire G10 complex is showing gains on the order of 0.1% to 0.2%.  This trend lower in the dollar remains strong (see chart below), but as I continue to remind everyone, we are nowhere near an extreme valuation in the dollar.  If, and it’s a big if, we see substantial weakening in the employment data, I think the Fed could decide to act and that would increase the speed of the downtrend (as well as goose inflation higher), but absent that, I do not see a sharp decline, rather a slow descent.  Remember, this is exactly what Trump and Bessent want, a more competitive dollar for the manufacturing sector.

Source: tradingeconomics.com

As it is the first week of the month, there is plenty of data to digest.

TodayChicago PMI43.0
TuesdayISM Manufacturing48.8
 ISM Prices Paid69.0
 JOLTs Job Openings7.3M
WednesdayADP Employment 85K
ThursdayNonfarm Payrolls110K
 Private Payrolls110K
 Manufacturing Payrolls-6K
 Unemployment Rate4.3%
 Average Hourly Earnings0.3% (3.9% y/Y)
 Average Weekly Hours34.3
 Participation Rate62.3%
 Initial Claims240K
 Continuing Claims1960K
 ISM Services50.5
 Factory Orders8.0%
 -ex Transport0.9%

Source: tradingeconomics.com

In addition to the payrolls, we hear from Chairman Powell again on Tuesday and Atlanta Fed president Bostic twice.  I guess the rest of the FOMC took a long holiday week(end).

As it’s a holiday week, I expect that activity will be light, although headline bingo remains a key part of the markets today.  I feel like the trends are well entrenched though, with the dollar slipping, equities and commodities rallying and bonds currently leaning toward lower yields, although that seems out of sync with the other markets.  But in the summer, with less liquidity and activity, anomalies can continue for a while.

Good luck

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Full Schmooze

Posted on by

The temperature’s starting to fall
With Israel and Iran’s brawl
On hold for the moment
Though either could foment
Resumption, and break protocol
 
But that truce combined with the news
That Trump’s team are pushing full schmooze
On trade, has the markets
Increasing their bull bets
While skeptics are singing the blues

 

President Trump is having a pretty remarkable week.  The successful attack and destruction of Iran’s nuclear enrichment facilities combined with the news that the US and China have agreed the details of the trade framework that was outlined in Geneva and followed up in London has market participants feeling a lot better about the world this morning.  Add to that the news that a particularly onerous part of the BBB, Section 899, which was nicknamed the Revenge clause for its tax targeting anybody from nations that imposed excess taxes on US companies internationally, being stripped after negotiations with European leaders, and the fact that NATO has gone all-in on increasing their spending, and Mr Trump must be feeling pretty good this morning.  Certainly, most markets are feeling that, except those that thrive on chaos and fear, like precious metals.

In fact, this morning it seems that the entire discussion is a rehash of what has occurred all week with very little new added to the mix.  Data from the US yesterday was mixed, with Claims a bit softer and Durable Goods quite strong while the third look at Q1 GDP was revised lower on more trade data showing imports were greater than first measured while Consumer Spending and Final Sales were a bit weaker than expected.  Net, there was not enough to push a view of either substantial strength or weakness in the economy, so investors and their algorithms continue to buy shares.

The other story that continues to get airplay is the pressure on Chairman Powell and questions about whether at the July meeting Fed governors are going to vote against the Chairman.  Apparently, it has been 32 years since that has occurred (and you thought they were actual votes!) and the punditry is ascribing the dissent to politics, not economics.  It should, of course, be no surprise that there is a political angle as there is a political angle to every story these days, but the press is particularly keen to point out that the two most vocal Fed governors discussing rate cuts were appointed by Trump.

However, despite all the talk, the futures market does not appear to have adjusted its opinion all that much as evidenced by the CME chart of probabilities below.  In fact, over the past month, the probability of a cut has declined slightly.  Rather, I would contend that on a slow news Friday, the punditry is looking for a story to get clicks.

The last story of note is about the dollar and its ongoing weakness.  This is an extension of the Fed story as there is alleged concern that if the Fed is perceived to lose some of its independence, that will be a negative for the dollar in its own right, as well as the fact that the loss of independence would be confirmed by a rate cut when one is not necessary (sort of like last autumn prior to the election.  Interestingly, I don’t recall much discussion about the Fed’s loss of independence then.)

But, in fairness, the dollar has continued to decline with the euro trading to its highest level, above 1.17, in nearly four years.  It is hard to look at the story in Europe and think, damn, what a place to invest with high energy costs and massive regulatory impediments, so it is reasonable to accept that what had been a very long dollar position is getting unwound.  But look at the next two charts (source: tradingeconomics.com) of the euro, showing price action for one year and for five years, and more importantly notice the trend lines that the system has drawn.  There is no doubt the dollar is under pressure right now, but I am not in the camp that believes this is the beginning of the end of the dollar’s global status.  Remember, too, that President Trump would like to see the dollar soften to help the export competitiveness of the US, and so I would not expect to hear anything from the Treasury on the matter.

However, while these medium and long-term trends are clear, the overnight session was far less exciting with the largest move in any major currency the ZAR (+0.5%) which is despite the decline in gold and platinum prices.  Otherwise, today’s movement is basically +/- 0.2% across both G10 and EMG currencies.

Speaking of the metals, though, they are taking it on the chin this morning as we approach month end and futures roll action.  Gold (-1.3%), silver (-1.7%), copper (-0.9%) and platinum (-4.4%) are all under pressure, although all remain significantly higher YTD.  However, to the extent that they represent a haven and the fact that havens seem a little less necessary this morning seems to be the narrative driver adding to the month end positioning.  Meanwhile, oil (+0.5%) continues to bounce ever so slowly off the lows seen immediately in the wake of the bombing attacks.

Circling back to equity markets, after a nice day in the US yesterday, with gains across the board approaching 1% and the S&P 500 pushing to within points of a new all-time high, Japan (+1.4%) followed suit as did much of the region (India, Taiwan, New Zealand, Indonesia) but China (-0.6%) and Hong Kong (-0.2%) didn’t play along.  Europe, though, is having a positive session with gains ranging from 0.65% (DAX) to 1.3% (CAC) and everything in between.  It seems that the NATO spending news continues to support European arms manufacturers and the cooling of tensions in the Middle East has lessened energy concerns.  US futures are also bright this morning, up about 0.5% at this hour (7:40).

Finally, bond markets are selling off slightly after a further rally yesterday and yields since the close have risen basically 3bps in both Treasury and European sovereign markets.  There is still no indication that any government is going to stop spending, rather more increases are on the horizon, but there is also no indication that central banks are going to stop supporting this action.  No central bank is going to allow their nation’s bond market to become unglued, regardless of the theories of what they can do and what they control.  Ultimately, they control the entire yield curve.

On the data front, this morning brings Personal Income (exp 0.3%), Personal Spending (0.1%) the PCE data (Core 0.1%, 2.6% Y/Y; Headline 0.1%, 2.3% Y/Y) and at 10:00 Michigan Consumer Sentiment (60.5) and Inflation Expectations (1yr 5.1%, 5yr 4.1%).  There are several more Fed speakers, including Governor Cook, a Biden appointee who is a very clear dove, but has not yet agreed that rate cuts make sense.  It will be interesting to see what she has to say.

It is a summer Friday toward the end of the month.  Unless the data is dramatically different than forecast, I expect that the dollar will continue to slide slowly for now, although I do expect the metals complex to find a bottom and turn.  As to equities, apparently there is no reason not to buy them!

Good luck and good weekend

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The World is Aghast

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At one time, not long in the past
New York was a finance dynast
But yesterday’s vote
Does naught to promote
Its future. The world is aghast
 
As well, yesterday, Chairman Jay
Had nothing of note new to say
He’s watching quite keenly
And somewhat serenely
But rate cuts are not on the way

 

I must start this morning on the results from the NYC mayoral primary election where Zohran Kwame Mamdani won the Democratic primary and is now favored to win the general election.  His main rival was former NY state governor, Andrew Cuomo, a flawed man in his own right, but one with the usual political peccadillos (greed, grift and sexual misconduct).  Mamdani, however, is a confirmed socialist whose platform includes rent freezes, city owned grocery stores (to keep costs down) a $30/hour minimum wage (not sure how that will keep grocery prices down) and a much higher tax rate, especially on millionaires.  In addition, he wants to defund the police.  Apparently, his support was from the younger generations which is a testament to the failures of the education system in the US, or at least in NYC.

I mention this because if he does, in fact, become the mayor of NYC, and can enact much of his agenda, the financial markets are going to be interrupted in a far more dire manner than even Covid or 9/11 impacted things.  I expect that we will see a larger and swifter exodus from NYC of both successful people and companies as they seek other places that are friendlier to their needs.

Now, even though he is running as a Democrat, it is not a guarantee that he will win.  Current mayor, Eric Adams is running as an independent, and while many in the city dislike him, he may seem to be a much better choice for those somewhere in the middle of the spectrum.  As well, even if he wins, his ability to enact his agenda is not clear given his inexperience and lack of connections within the city’s power centers. Nonetheless, it is a real risk and one that needs to be monitored closely.  

As to Chairman Powell, as well as the other six FOMC members who spoke yesterday, the generic view is that while policy may currently be slightly tight, claimed to be 25bps to 50bps above neutral across all of them, they are in no hurry to adjust things until they have more clarity regarding the impact of tariffs on inflation and the economy.  They paid lip service to the employment situation, explaining that if things took a turn for the worse there, it would change the calculus, but right now, they’re pretty happy.  It can be no surprise that there were zero deep questions from the Senate committee members, and I expect the same situation this morning when he sits down in front of the House.  

Since the cease fire between Iran and Israel seems to be holding, market participants are now searching for the next catalyst for market movement.  In the meantime, let’s look at how things are behaving.  The “peace’ in the Middle East saw the bulls return with a vengeance yesterday in the US, with solid gains across all major indices, but the follow through was less robust.  While Chinese shares (Hang Seng +1.2%, CSI 300 +1.4%) both fared well, the Nikkei (+0.4%) was less excited and the rest of the region was more in line with Japan than China, mostly modest gains.  From Japan, we heard from BOJ member Naoki Tamura, considered the most hawkish, that raising interest rates was necessary…but not right away.  That message was not very well received.

However, Europe this morning is on the wrong side of the ledger with Spain’s IBEX (-1.25%) leading the way lower although other major bourses are not quite as poorly off with the DAX (-0.4%) and CAC (-0.2%) just drifting down.  NATO is meeting in The Hague, and it appears that they are finalizing a program to spend 5% of respective national GDP’s on defense, a complete turnaround from previous views.  This is, of course, one reason that European bond markets have been under pressure, but I expect it would help at least portions of the equity markets there given more government spending typically ends up in that bucket eventually.  As to US futures, at this hour (7:10) they are little changed to slightly higher.

In the bond market, US Treasury yields continue to slide, down another -1bp this morning and now under 4.30%.  Despite President Trump’s hectoring of Chairman Powell to lower Fed funds, perhaps the fact that Powell has remained firm has encouraged bond investors that he really is fighting inflation.  It’s a theory anyway, although one I’m not sure I believe.  European sovereigns have seen yields edge higher this morning, between 1bp and 2bps as the spending promises continue to weigh on sentiment.  However, even keeping that in mind, after the spike in yields seen in early March when the German’s threw away their debt brake, European yields have essentially gone nowhere.

Source: tradingeconomics.com

While this is the bund chart, all the major European bond markets have tracked one another closely.  Inflation in Europe has fallen more rapidly than in the US and the ECB’s base rate is sitting 200bps below Fed funds, so I suppose this is to be expected.  However, if Europe actually goes through with this massive military spend (Spain has already opted out) I expect yields on the continent to rise.  €1 trillion is a quite significant ask and will have an impact.

Moving to commodity markets, after its dramatic decline yesterday, oil (+0.8%) is bouncing somewhat, but that is only to be expected on a trading basis.  Again, absent the closure of the Strait of Hormuz, I suspect that the supply/demand dynamics are pointing to lower prices going forward, at least from these levels.  In the metals markets, gold (+0.15%) which sold off yesterday as fear abated, is finding its footing while silver (-0.5%) is slipping and copper is unchanged.  It feels like metals markets are looking for more macroeconomic data to help decide if demand is going to grow in the near term or not.  A quick look at the Atlanta Fed’s GDPNow estimates for Q2 show that growth remains quite solid.

Source: atlantafed.org

However, another indicator, the Citi Economic Surprise Index, looks far less promising as it has moved back into negative territory and has been trending lower for the past 9 months.

Source: cbonds.com

At this point, my take is a great deal depends on the outcome of the BBB in Congress and if it can get agreed between the House and Senate and onto President Trump’s desk in a timely manner.  If that does happen, I think we are likely to see sentiment increase, at least in the short term.  That should help all economically sensitive items like commodities.

Finally, the dollar is modestly firmer this morning, rebounding from yesterday’s declines although still trending lower.  The price action this morning is broad based with modest moves everywhere.  The biggest adjustment is in JPY (-0.6%) but otherwise, 0.2% pretty much caps the movement.  Right now, the dollar is not that interesting, although I continue to read a lot about how it is losing its luster as the global reserve currency.  There is an article this morning in Bloomberg explaining how China is trying to take advantage of the current situation to globalize the yuan, but until they open their capital markets, and not just for $50K equivalents, but in toto, it will never be the case.

On the data front, aside from Chair Powell’s House testimony, we see New Home Sales (exp 690K) and then EIA oil inventories with a modest draw expected there.  There are no other Fed speakers and certainly Powell is not going to change his tune.  To my eyes, it is setting up as a very quiet session overall.

Good luck

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