Tag Archives: #SOTU

To Excess

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The State of the Union Address
Was, as is Trump’s wont, to excess
He touted his claims
And handed out blames
While focusing on his success
 
The market responded, it seems
Like Trump answered all of its dreams
Stocks round the world rose
Which shows, I suppose
The world does approve of his schemes

As I look at my screen this morning, literally every major equity market is higher, as per the below screenshot, as are US futures.

Source: tradingeconomics.com

In fact, if you ignore Russia, which hasn’t really been relevant since the Ukraine invasion-imposed sanctions, every market is higher over the last year, and US markets are the true laggards as seen by their monthly performance.  But you cannot look at this picture and determine that anything President Trump said last night was negative for the global economy.  I guess it’s full speed ahead now.

In true Trumpian fashion, the president remains incredibly optimistic about the future for the US and the Western world and perhaps that is what is reflected here this morning.  However, there were precious few new initiatives announced so it is unclear to me that this is going to be a topic of discussion in the financial markets going forward, although you can be sure that the political narrative is going to be very active.

So, let’s move on to things that matter for markets.

Is she hawk or dove?
Takaichi hates China,
Not easy money

As you can see in the above table, Japan’s Nikkei 225 rose sharply, nearly 4%, but that had nothing to do with the SOTU.  Rather, her administration named two new BOJ governors (it was simply time to rotate some) and both were seen as quite dovish.  In fact, one, Toichiro Asada, is known for his belief in the benefits of MMT (you remember the magical money tree idea that governments that print their own currency don’t need to worry about overborrowing).  The upshot is that while Japanese stocks raced to yet more new highs, as per the below chart, JGB yields reversed their recent declines and rose (10yr +5bps, 30yr +10bps) and the yen (-0.6%) continued its recent slide, although remains well above (dollar below) the 160.00 level, which many see as the BOJ’s line in the sand regarding intervention.

Source: tradingeconomics.com

But other than this story, it is much harder to find things that have been market drivers.  To my eye, we continue to see market participants laying back in most places as they are still recuperating from the raucous first six weeks of the year.

So, let’s go to the tape.  We’ve already seen the equity performance around the world, with the narratives forming that the US tariff situation is now a reduced stress on global trade as they have been reduced to 10% globally.  As well, there have been an increasing number of rebuttals to the AI piece I mentioned on Monday, with this one, I think, the most succinct takedown of the idea that AI is going to eat the world and drive us into a recession with no jobs left for people.  As such, Monday’s narrative of all stocks being worthless has changed.  Elsewhere, the tariff story and tech rally have been the key discussion points across markets.

In the bond market, yields are a touch higher with Treasuries (+2bps) edging up on what seems like ordinary trading.  The short-term trend here is lower yields, as per the chart below, but we know that nothing moves in a straight line.

Source: tradingeconomics.com

As to European sovereign yields, they, too, are mostly a few ticks higher this morning although, this also appears to be simple trading activity rather than a new narrative.  It is interesting that there are more stories today about ECB President Lagarde stepping down early, which is diametrically opposed to what she said when asked the question recently.  As I said before, I think she steps down and is going to run for President of France.

The commodity markets continue to be the place with the most price action and this morning is a continuation of that recent trend.  Gold (+0.9%), silver (+3.7%) and platinum (+5.5%) are all continuing their rebound from the extreme declines seen back on January 29th.

Source: tradingeconomics.com

I do not have any inside track as to the driver of those moves, but I continue to read and hear about significant intervention designed to burst those bubbles (and they were clearly bubbles) and allow key institutions to cover short positions at better prices.  The problem with these stories is that we have heard for years about the manipulation of the prices of both gold and silver by large banks, and the purveyors of those stories have neither great reputations nor track records, so it is always a tough sell in my mind.  There is no question that when markets go parabolic, as the precious metals did through January, the reversals have always been dramatic.  However, I cannot speculate on the driver as often times, there doesn’t need to be one.  This cartoon from Kaltoons demonstrates it perfectly.

Turning to oil (+0.8%), Iran remains a key narrative and continues to support the front month pricing.  However, it appears that several futures spreads are falling sharply, indicating a potential glut in physical supplies has developed, at least for now.  As I look at the front contracts in the futures curve, we are still in backwardation, which implies a shortage, although I suppose that is the Iran effect.  

Source: barchart.com

I understand the short-term concerns here regarding potential military escalation there, but nothing has changed my view that the long-term energy situation is one of abundance and maintaining much higher oil prices will be very difficult for the long-term.  After all, look at Venezuela, which has already increased production back above 1mm barrels per day with contracts being signed for more activity.  Too, Argentina’s Vaca Muerta shale production is at new record levels, also ~1 mmm bpd and we continue to see growth offshore Brazil and Guyana.  Longer term, there is plenty around, I think.

Finally, the dollar is mixed this morning as the yen’s weakness is being offset by modest strength in the euro (+0.1%) and pound (+0.2%).  However, the big movers today are KRW (+0.9%) which has benefitted from inward equity flows and hopes for tariff relief, as well as ZAR (+0.5%) on the back of the precious metals rally and CLP (+0.4%) on copper’s strength.  Remember, the US is not overly concerned about USD weakness in the FX markets as it suits the administration’s goals of reducing the trade deficit and encouraging onshoring of production.  But even with that, looking at the DXY, it is just below 98.00 and remains right in the middle of its trading range for the past 9 months.

Source: tradingeconomics.com

There is no major data out this morning with only the EIA oil inventories where a very modest build is anticipated.  

Big picture, I don’t think anything has changed.  Fiat currencies continue to lose value relative to ‘stuff’.  Equity markets continue to benefit from the global ‘run it hot’ policy and there is no clarity regarding the outbreak of a war in Iran.  With this in mind, it is hard to see a large move in the dollar in the near future.

Good luck

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Not Very Far

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Said Jay, we are not very far
From when we can all wave au revoir
To higher for longer
With confidence, stronger,
Inflation will reach our lodestar
 
“We’re waiting to become more confident that inflation is moving sustainably at 2%.  When we do get that confidence — and we’re not far from it — it’ll be appropriate to begin to dial back the level of restriction.”  So said Chairman Powell yesterday in front of the Senate Banking Committee in response to some of the questions he received.  Nuff said!  Regardless of the fact that there has been limited indication of slowing economic activity (although this morning’s payroll report will be critical), it seems quite clear that Powell is under a great deal of pressure to reduce rates.  One must assume this pressure comes from the White House as in last night’s SOTU speech, President Biden even mentioned that mortgage rates were too high, and he was going to push them down.  Clearly, the only tool that Biden has is to lean on Powell to cut rates.
 
But despite what had appeared to be a concerted effort by every Fed speaker to push back against the proximity of the first interest rate cut for this cycle, it appears that Powell is blinking.  Interestingly, while the Fed funds futures markets didn’t really adjust very much, we did see the 2yr Treasury yield fall back 5bps and this morning it sits slightly below 4.50%, its first time back to this level since the surprising CPI print last month.  Of course, equity markets love the message, and we continue to see new highs on a daily basis.  But we are also continuing to see new highs in the anti-fiat monies, gold and bitcoin.  The world is not without risk.
 
An angry old fella named Joe
Last night tried explaining our woe
Was not his, to blame
Though he wouldn’t name
The culprit, throughout the whole show
 
While I try to leave politics out of this missive, the status of the SOTU is such that I don’t believe it can be completely ignored.  My takeaway from last night’s speech was that President Biden, in an attempt to show vigor, came across as the angry old man shaking his fist and yelling at the clouds.  He had a laundry list of things he claims to want to accomplish, all of which will cost trillions of dollars, and none of which are likely to be enacted before the election.  Many pundits pointed out this seemed more like a campaign speech than a SOTU and I think there is merit in that view.  In the end, while we understand where the pressure on Powell is coming from, I don’t believe this is going to change anything, certainly not from a market perspective.
 
And finally, it’s time to turn
To data for which we all yearn
The Payroll report
Which, if it falls short
Will likely give hawks great heartburn

Looking ahead, this morning brings the monthly payroll report.  Current median expectations are as follows:

Nonfarm Payrolls200K
Private Payrolls160K
Manufacturing Payrolls10K
Unemployment Rate3.7%
Average Hourly Earnings0.3% (4.4% Y/Y)
Average Weekly Hours34.3
Participation Rate62.6%

Source: tradingeconomics.com

Recall, last month’s number was massively higher than anticipated at 353K and had higher revisions as well.  The revisions were almost more surprising than the headline number as the trend for the entire previous year had been for revisions to be to softer data.  There will certainly be revisions to the January data as well, so there is a great deal of uncertainty.  My sense is, though, that the market really wants to see a softer number with downward revisions as that will work toward cementing the case for the Fed to cut rates even sooner.  Sub 150K and look for a bond and stock rally.  Above 250K and bonds will sell off, although stocks have a life of their own.  At least that’s one man’s view.

Ok, let’s look at how things played out overnight ahead of this key data.  Asian markets followed the US rally with green across the screen.  The Hang Seng, which is seen as the tech proxy in Asia, rallied most, 0.75%. Europe, on the other hand, is having a tougher day with most markets slightly softer although the FTSE 100 is down -0.5%, the clear laggard this morning.   Apparently, Madame Lagarde’s comments did nothing to support the hopes that rate cuts were coming soon as ostensibly, rate cuts were not even discussed in the meeting and all signs point to June as the first time by which they will have confidence in the inflation story, if it is to come.  Meanwhile, US futures are pointing a bit lower, -0.3%, at this hour (8:00).

In the bond markets, Treasuries have edged lower another 1bp this morning and we are seeing yields across the board in Europe decline by between 2bps and 4bps.  I can’t tell if that is confidence in the ECB (doubtful) or belief that the ongoing decline in economic activity (Eurozone GDP in Q4 was confirmed at 0.0% Q/Q and 0.1% Y/Y) has simply encouraged investors that rates are going to fall with no chance of a backup.  Meanwhile, JGB yields were unchanged overnight despite the ongoing excitement(?) that the BOJ may raise rates a week from Monday.

Oil prices have retreated a bit (-0.6%) but are essentially range trading and have been for the past month.  However, the star of the commodity space continues to be the barbarous relic, with gold rallying another 0.3% this morning to yet another new all-time high.  As to the base metals, copper is unchanged this morning, but has been on a roll lately while aluminum is higher by 0.65%.  Metals investors are gaining confidence that not only is there going to be no landing in the US, but that China is going to stimulate more.

Finally, the dollar remains under pressure overall as yields continue to decline.  While the euro is a touch softer this morning, virtually every other G10 currency is firmer with JPY (+0.55%) leading the way.  Remember, too, that with FY end approaching for Japan, we will begin to see Japanese corporates repatriating funds which typically sees further yen strength.  Combine that seasonal activity with the relatively new BOJ hawkishness/Fed dovishness combination and the yen could rally a lot more.  After all, it has fallen a lot in the past two years!  But, while the G10 currencies are generally having a good day, the picture in the EMG bloc is far more mixed with BRL (-0.6%) the laggard after total credit in Brazil was shown to have fallen in January for the first time since the pandemic.  On the flipside, CLP (+1.0%) is rallying after a higher-than-expected CPI report (4.5%) has traders looking for tighter monetary policy than previously anticipated.

Aside from the payroll report, there is no other data to be released and there are no Fed speakers on the calendar.  Yesterday we did hear Cleveland Fed president Mester sound more hawkish, becoming the third FOMC member to discuss only 2 cuts this year, and I maintain that when the dot plot comes out, that could be the median view.  But for now, markets and investors remain euphoric about the apparent Powell dovishness, so that will be the driver absent a huge NFP this morning.  For the dollar, that will be bad news.

Good luck and good weekend

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