Da Bomb

Posted on September 8, 2026 by fxpoet

The payroll report was da bomb
But markets remained rather calm
So, what will it take
To get stocks to break?
If job growth leaves nary a qualm

Perhaps this week’s ‘flation report
Will frighten the risk averse sort
If prices jump higher
The bond market choir
Will trill for a hike, costs, to thwart

By now, you have heard about the blowout NFP report on Friday, where new jobs totaled 162K with revisions higher of the previous two months by an additional 55K. This was massively above the expectations going in of 56K. Perhaps even more surprising was the other survey, the Household survey from which the BLS calculates the Unemployment Rate. While the rate was unchanged at 4.1%, employment (+569K) and the labor force (+683K) both rose sharply compared to recent reports, although it does appear this was a catch up from weaker earlier data.

In the end, the idea that the economy is slowing has lost some of its mojo. This is evident in the Atlanta Fed’s GDPNow Q3 estimate as per below, where it is now tracking to 4.7% real GDP growth.

Similarly, the Fed funds futures market has rebounded to a 60% probability of a hike next week and another one by March of next year.

Personally, my take is that Chairman Warsh is ecstatic that the probability continues to hover either side of 50%. As I have written consistently, uncertainty may result in short-term volatility, but it forces position reductions and less market fragility. Remember, fragile markets are the ones that need to get bailed out.

Under the guise of good news is bad, equity markets suffered a bit on Friday, with the major indices falling between -0.3% and -0.5%, not great, but seemingly not the beginning of the end. Treasury yields did very little and the dollar slipped, but that was really all about the yen, which has been strengthening quite nicely over the past several sessions. My thesis that the yen would continue to weaken is starting to look a little shaky as the dollar has now traded below its intervention lows and back to a level not seen since mid-February of this year as per the below chart from tradingecononomics.com.

While one hike is set
Is another coming soon?
And what of the Fed?

Which takes me to another question that has been difficult to answer; if both the BOJ and the Fed, as well as every other major central bank, raise rates this week and next, and are assumed to continue raising rates over the next year, as per the below chart from rateprobability.com, does that really change the relative situation and should FX rates move substantially on the news?

According to the chart, the BOJ is going to hike by 25bps more than the Fed over the next year. Is that really worth 10 big figures in spot USDJPY? More? Less? The interesting thing about the weekend is that Japanese 10-year yields slipped -2bps and appear to have broken free, at least temporarily, from the gravity of Treasury yields as the latter continue to edge higher, rising 2bps since Friday as per the below chart. (Europe was basically unchanged.)

Source: tradingeconomics.com

As I weigh the evidence, it appears that the market is pushing to find the fail-safe point for carry traders, as well as Japanese investors writ large, and where interest rate differentials, as well as outright rates, need to be to alter decades worth of behavior. Perhaps it is not the yield differentials that are driving the FX rate but the other way around. If USDJPY falls far enough, that could well be the catalyst for a major change in the relative yield structure between dollars and yen. Bessent certainly has a delicate task ahead of him. On an unscientific basis, but rather one that is simply my feeling from experience, and looking at the yen chart for the past five years, I would suggest that while 150 is the next big round number, we are likely to head to somewhere between 140 and 145 as the new home, a place where the yen has strengthened sufficiently to impact trade, but not so far as to result in massive Treasury sales. We shall see.

Source: tradingeconomics.com

Turning away from the eccentricities of the yen, oil prices are rising again, up another 2.7% this morning and now well above $90/bbl. This is, not surprisingly, dragging both gasoline and diesel prices along for the ride, a situation that I’m sure has the White House plotting. But the Houthis have attacked Saudi oil infrastructure and the ongoing tit-for-tat in the Gulf and the Strait continues. The WSJ had a headline story about the US naval blockade really starting to bite there as oil revenues dry up. This has certainly been effective, although it is taking longer than, I’m sure, the administration had wanted. Elsewhere in the commodity space, while gold and silver are little changed to slightly lower this morning, copper (+2.0%) has continued to rally and has reached new all-time highs on both the LME and the COMEX. This continues to be a story of insufficient supply for requisite demand, and demand continues to grow as data centers keep mushrooming up. But copper mines take a decade or more to find, permit and bring online, and there haven’t been any in the works for years. I think this is a market that despite being at record highs has room to run.

Equity markets have also been under pressure as the combination of anticipated rate hikes, increased war concerns and higher energy prices has weighed on markets writ large. Obviously, oil companies and mining companies are benefitting from the price movement, although higher interest rates are a drag, but elsewhere, things are tougher. So, looking across Asia, red was the color of the day (Japan -1.7%, China -0.4%, HK -0.4%, Korea -0.6%, India -0.7%, Taiwan -0.5%, Australia -1.0%). In Europe, the picture is not quite as grim, with the declines smaller (Germany -0.2%, France -0.1%, Spain -0.3%) but declines they are. As to US futures, at this hour (6:55), -0.6% seems to describe the situation. Of them all, I think the yen’s strength has been the driver for Nikkei under performance.

Finally, the FX markets, away from the yen show modest dollar strength. The euro (-0.1%), pound (-0.1%), CHF (-0.3%), AUD (-0.1%) are all slightly softer as trading desks get back to full strength now that the summer has unofficially ended. While yen is the major topic of conversation, it is no surprise to see CLP (+03%) rally alongside copper and KRW (+0.2%) continues its several month appreciation, which has now reached 16% since July 1^st. Otherwise, it is not too exciting on this front this morning either.

As I mentioned above, we have PPI, CPI and the first of the multiple central bank meetings this month, the ECB, on Thursday.

Today	Consumer Credit	$11.7B
Thursday	ECB rate decision	2.50% (current 2.25%)
	Initial Claims	205K
	Continuing Claims	1790K
	PPI	0.4% (5.3% Y/Y)
	Core PPI	0.3% (4.6% Y/Y)
	Existing Home Sales	3.99M
Friday	CPI	0.4% (3.4% Y/Y)
	Core CPI	0.2% (2.4% Y/Y)
	Michigan Sentiment	51.0

Source: tradingeconomics.com

Obviously, all eyes will be on the CPI data but as things heat up in the gulf, I suspect we can look for movement catalysts there as well. In the meantime, the yen will be of great interest to one and all, whether traders, investors or Treasury Secretaries. If we see this strength continue, look for more discussion and other market movement. I don’t foresee a collapse in the dollar, but rather a steady reversal of what has been a steady trend higher in the dollar, lower in the yen.

Good luck

Adf

Center of Blame

Posted on September 2, 2026 by fxpoet

It's not just the 'economy's heat
Why we're at the edge of our seat
But also, Iran
Where this all began
That's left traders feeling downbeat

Thus, crude oil's back in the game
As being the center of blame
How high can crude rise
Til bonds paralyze 
Activity, snuffing that flame

Bond yields remain topic A this morning as they continue to climb around the world. There are many opinions as to why that is happening but I think it boils down to either 1) increasing deficit spending by governments around the world resulting in significant increases in supply thus driving yields higher, or 2) rising oil prices after the US-Iran conflict has seen an increase in military action on both sides thus driving the inflation narrative further. Arguably, it is a combination of both these things.

Much has been written that these are the highest yields since 2011 or 2008 (or 1996 in Japan’s case) and how that makes them, somehow, more dangerous. Or at least that is the implication. When it comes to bond yields though, I always like to maintain perspective by looking at the long-term history of 10-year yields. If you look at the chart below from FRED, I think it fair to ask the question, what is the aberration, current yields at 4.8% or yields at 2.5% or lower seen post the GFC?

As I have written before, the average 10-year yield over the past 60 years is 5.81%, still 100bps higher than current levels. I understand that debt outstanding has grown dramatically over the years, but it’s not like it wasn’t growing during Covid. In fact, it was exploding higher then too. Ultimately, the original sin is excess government spending relative to the economy’s overall size and, unfortunately, the underlying thesis of RIH is that is not going to change. To me the question becomes, how does one prepare for the impacts of this policy. And remember, this is not a US only policy, it is now the default policy of every government in the world, save perhaps Switzerland.

How can it get fixed? That is the $64 trillion question and there is no easy answer. If governments around the world reduced their spending, especially on things that add no true economic value (subsidies for green energy are huge and immediately come to mind), it would help but not solve the problem. Entitlement spending is the major expense everywhere in the G10 and as those nations age demographically, that will only get worse.

I haven’t discussed the 4^th Turning in a while, but this is all of a piece with that scenario, massive institutional changes as old institutions, be they corporations, central banks, government structures or educational organizations, will be redesigned for the new age. Perhaps that is the promise of AI, a “voice” that can analyze history and help guide future decisions. Alas, mankind is mankind, and I don’t foresee that changing so whatever comes out on the other side, it, too, will only have four generations of life!

Was it hint or threat?
Could Ueda hike fifty?
No breath holding, please

The other story of note this morning was that BOJ Board Member Takata, a known hawk, gave a speech and indicated that the BOJ could surprise with a 50bp hike this month, or perhaps hike two months in a row rather than their current once every six months cadence. Bloomberg’s article was succinct. This story did have a modest impact on the yen (+0.25%) as you can see in the chart below.

Source: tradingeconomics.com

But if we step back from the 1-week view above to the movement over the past year, as per the below chart, it doesn’t appear to have had a significant impact.

Source: tradingeconomics.com

The post-intervention pattern remains perfectly intact. However, it did help increase the probability of further rate hikes by the BOJ as you can see in the rateprobability.com chart below. The blue line is the current market compared to previous readings, with the market now expecting a total of 100bps of hikes during the next year.

Alas, that did not help the JGB market, where yields remain at the 3.0% level, although they did not rise further last night. Speaking of bonds, Treasury yields, which climbed 3bps yesterday, are unchanged this morning but European sovereign yields are all higher by between 3bps and 5bps, with France the worst case.

Looking at equity markets, red is the color of the day as every major market either declined last night or is in the process of doing so as I type as per the below Bloomberg screenshot.

Certainly, there is a great deal of angst in equity markets right now, but when I looked at the S&P 500, it is still just 2.5% off its all-time highs from the middle of August. And this morning, while the NASDAQ futures are lower by -0.7%, the other two indices are unchanged as we await this morning’s ADP data (exp 47K) and this afternoon’s Beige Book. Higher yields are always a struggle for equity markets, but there is no collapse yet, that’s for sure.

In the commodity markets, oil (-0.7%) has backed off the highs from yesterday and has traded back below $90/bbl, although that remains far higher than just a few weeks ago. The escalation of fighting has certainly got traders nervous. As to the metals markets, while they have been getting crushed the last few days, this morning they are essentially unchanged, perhaps consolidating after that rough ride. You may remember there had been a strong negative correlation between oil and gold for a while which seemed to dissipate during the summer when things in the Gulf settled down. Well, as you can see in the chart below, that negative correlation is back in spades for the past two weeks. We will have to see how long that lasts, as historically, the two traded together more often than not.

Source: tradingeconomics.com

Finally, the dollar is creeping higher again this morning with the DXY (+0.1%) a pretty good proxy of the entire market with just a few exceptions. We already noted the yen but NZD (-1.2%) fell sharply after the RBNZ raised rates by 25bps, as expected, but sounded more dovish in their comments afterwards. As it happens, that helped the NZ stock market buck the negative trend as well. The other outlier was KRW (+0.8%) which continues to rally strongly on positive inflows and positive economic news. Last night, inflation data was better than expected, which helped the currency, rather than set it up for a rate hike.

And that’s really it today. We also get Factory Orders (0.6%, 0.2% ex Transport) and the EIA oil inventories. ADP could be interesting, but all eyes remain on Friday’s NFP on the data front. And of course, who knows what will happen in the Gulf.

There will be no poetry tomorrow as we show GCH Nubia’s Take Your Breath Away on the road to the Nationals next month.

Good luck

Adf

Markets This Hated

Posted on September 1, 2026 by fxpoet

No matter the nation you view
Its bondholders now see to rue
Their previous buys
And under that guise
Won't buy and bonds that are new

So, yields have been rising with haste
Though currencies have not debased
But markets this hated
Have often created
Reversals, which many then chased

Global Bond Yields Surge as Oil Prices Fuel Inflation Worries

The above article in the WSJ this morning captures the current zeitgeist in markets and seeks to explain why everything has turned bad. Certainly, the rebound in oil prices (+2.5%) is putting pressure on economies around the world, but so, too, are the unrestricted spending plans seen throughout the G10, and frankly across most of the planet. My take is that ‘run it hot’ (RIH) has become the economic strategy around the world. Perhaps the only outlier here is China, but even that is not really true, they are just running it hot differently. While most governments are responsive to their ~~people~~voters, Xi Jinping has demonstrated time and again he doesn’t really care about that. Rather he has his strategic goals of global domination and is pushing his economy to achieve that.

The upshot is that bond yields are rising and as you can see in the chart below, it is uniform, this is not just a US phenomenon. In fact, much ink has spilled that 10-year JGB yields have traded to 3.0%, their highest level in 30 years.

Source: tradingeconomics.com

Now, as I said at the top, oil prices are clearly one of the pressure points as there are fears it will feed into higher inflation, thus investors are demanding higher yields. And the other big story, which in my view is more concerning, is that governments are running increasingly larger budget deficits as the guns AND butter approach has become de rigueur in polite circles, or at least political ones. In fact, the concern is that governments are increasingly running primary budget deficits (spending less interest payments) which is why debt loads are growing so rapidly.

Source: @KobeissiLetter

And this leads to the RIH theory. If a country can grow its nominal GDP fast enough, then the denominator in the debt/GDP ratio will rise more quickly than the numerator thus reducing that ratio and implying a healthier fiscal outlook. Now, nominal GDP is the sum of real GDP, the number that is reported, plus inflation and that sum can be any combination. For instance, a nominal GDP growth of 7% could easily be 2% real GDP and 5% inflation, or vice versa. In the RIH scenario the typical outcome is that wages rise, corporate earnings rise, stock market values rise…and prices rise. The last point being the key political question.

Which takes us back to the bond market and a few questions I have. First an observation. In the old days (Greenspan era) a rule of thumb in the bond market was the 10-year yield should approximate nominal GDP growth as a stable base. I mention that because I am confused by the bond market reaction given the near universal view of Chairman Warsh’s speech on Friday was that he was hawkish and that rate hikes were coming. But if that is the case, and the Fed is going to more aggressively address inflation, then why are bonds selling off? Second, regarding the debasement trade, if bonds are selling off because of concerns over massive debt issuance and the assumed result that the dollar, and all currencies, are going to lose purchasing power, why is gold (-1.4%) selling off so aggressively? It strikes me that gold should be flying higher on the view that inflation is going to rise, but then, I’m just a poet. I guess one could make the technical argument that it is merely correcting its recent strong rally and it remains far above its 50-day moving average as per the below chart.

Source: tradingeconomics.com

I wish I had the answers here, but I don’t. However, something is amiss. If the Fed was so hawkish, the bond market would not be aggressively selling off. If the Fed was not hawkish, then the sell-off makes sense, but 90% of the punditry was wrong in their analysis of Warsh’s speech. (My guess is they see that as a bigger problem.) One thing I do know, though, is that the bond market is quite bearish right now with nary a positive word to be found. There is still a huge net short position in the bond futures market, as per the below chart.

Source: cotsignal.com

Here’s the thing about markets, at least in my experience. Markets tend to seek out the ‘pain’ trade, the trade that will hurt the most participants most significantly. As well, bull markets begin when all investors express uniform hatred of a product, like bonds right now. Combining those two things leads me to believe that we could well be setting up for a significant bond market rally. Just beware.

In the meantime, a quick tour of markets overnight shows negativity everywhere. After yesterday’s declines in the US session, Asia saw mostly red numbers (Tokyo -0.15%, China -0.3%, HK -0.9%, Malaysia -1.5%, Singapore -0.8%) although Taiwan (+1.8%) and Korea (+0.25%) bucked the trend on some tech support which is also why the NASDAQ fell the least yesterday. As to Europe, as you can see in the below screenshot from Bloomberg, it is universally red.

Lastly, US futures are under the gun this morning, down -0.5% except for the NASDAQ which is reversing yesterday’s outperformance and lower by -1.3% at this hour (7:20)

We’ve already discussed bonds, but this Bloomberg screenshot is worthwhile, I think.

Of course, the outlier here is the UK, which was closed yesterday so had a lot of catching up (down?) to do.

We’ve already discussed commodities which brings us to the dollar, which is rising despite yields rising everywhere. Now, the DXY is at 99.60, hardly new territory although the trend over the past year is marginally higher as per the below chart.

Source: tradingeconomics.com

If we look at individual currencies, JPY (-0.2%) has seen the dollar rise back above 160 as the post intervention price action remains consistent with every previous effort. Perhaps the most surprising outcome today is ZAR (-0.1%) which is holding up quite well despite much higher oil prices and much weaker gold prices, the two key issues in that economy. But net, as much as people worry about the debasement of the dollar, it appears they are more worried about the debasement of other currencies more rapidly.

On the data front, this morning brings ISM Manufacturing (exp 55.2) and Prices Paid (72.0) as well as the JOLTs Job Openings report (7.3M). Fed Governor Barr speaks before the data at 9:00 this morning so I wonder if he will reaffirm the hawkish vibe, and if he does, shouldn’t that help the bond market? I am still focused on Friday’s NFP as the next truly important piece of news, but there is an awful lot that can happen between now and then, especially with this President.

Good luck

Adf

Hike!

Posted on August 31, 2026 by fxpoet

Said Kevin, well, not really much
And pundits, their pearls, they did clutch
The haters all said
He's over his head
While others admired his touch

The hawks, meanwhile, think he said "Hike!"
And two-year yields promptly did spike
The dollar exploded
And gold just eroded
Though stocks drifted somewhat dreamlike

I must have listened to a different Kevin Warsh speech than most in the market on Friday morning, as the extreme hawkishness that seems to be the consensus outcome was completely lost on me. Perhaps this is simply another Warshach Test. He certainly repeated that the Fed is going to be successful at achieving their 2% target, although I clearly missed the part where he said they would be hiking in September. But I must be the only one. Futures traders clearly heard a hike was coming as the probability for a hike has risen to 62%, from about 32% prior to Warsh’s comments as you can see below.

In addition, a second hike in January seems highly probable and the chance of another one next summer has risen to 25%.

Personally, I thought the most interesting, and encouraging, feature of the speech was his willingness to discuss the details of how PCE is created, a combination of 199 subcategories. This is akin to the way my favorite inflation analyst, @inflation_guy, Mike Ashton, views the CPI data, and he has created a diffusion index to follow just how many categories are rising rapidly and how many are either falling or rising less rapidly than the overall rate. Here is his discussion of the July data, released in August. And here is a chart from that note (which you all should read and subscribe to as it’s free) showing his diffusion index and why inflation is not likely to subside quickly.

But clearly, the market is not interested in my spin, nor in the spin of anyone who disagrees that a hike is on the way. The behavior of the Treasury market was quite interesting with 2yr yields jumping 12bps while 10yr yields rose 4bps and 30yr yields rose only 1bp. This was a classic bear flattening of the curve, and it was the driver behind the dollar’s strength (+0.55%) and more impressively, the 3+% decline in the price of gold and silver. If yields are going up, there is no reason to own gold, apparently. That seems at odds with all last week’s talk about the resurrection of the debasement trade, but then, I’m just a poet.

One last thing. After rereading the speech several times (talk about a boring life) my interpretation of the following comment within his Key Principles seems to be very different than the rest of the Street.

“Fifth, short-term interest rates are the predominant tool to achieve the dual mandate. Unconventional policies to spur economic activity may suit genuine crises but should otherwise be used sparingly, if at all.”

I read this as he wants to reduce the balance sheet to reduce the Fed’s market impact and use interest rates as their policy tool and that currently, reducing the balance sheet will result in tighter policy with the same Fed funds rate. But it appears the first part of my view, which is something Warsh has explained numerous times, is being ignored by the trading community. Of course, it will take a change of the ‘ample reserves’ framework to get the Fed to reduce its balance sheet, and that will need the imprimatur of the balance sheet task force as well as time for the rest of the committee to get on board.

Regardless of my views, though, the market is now increasingly convinced the Fed is going to hike next month absent much weaker than expected NFP and CPI releases.

It wasn't all that long ago
When war in the Gulf ran the show
When fighting expanded
The market demanded
More havens as risk was the foe

But now, when the fighting gets hot
Most traders don't give it a thought
We're back to the Fed
And all that they've said
As key to what's sold or what's bought

Apparently, there was further military action in the Persian Gulf and the Strait of Hormuz yesterday as the US struck missile launchers on a small island there, claiming the IRGC was planning to launch more naval mines. Iran said there will be great consequences, but the missile volleys they sent at US bases in Jordan were intercepted which prompted one of the funniest responses on X that I have seen.

Meanwhile, oil (+3.3%) prices have risen in response, but it has not generated nearly the excitement that we have seen in the past. And I cannot help but look at the price action in oil over the past six months, since the war began, and remain unconcerned about the future. Certainly, there has been volatility, but as I have highlighted in other markets, volatile markets are anti-fragile, and that is worth a lot.

Source: tradingeconomics.com

As to the metals markets, after Friday’s washout across the board, this morning gold is unchanged, silver (+1.7%) has rebounded more than $1/oz and copper (+0.4%) has basically recouped its much smaller decline from Friday. Nothing has changed my view that all metals remain in uptrends.

Perhaps the most interesting reaction to the Warsh speech was the equity market on Friday, where the main indices only fell by very modest amounts. There was no indication from that price action that there is concern about a major tightening cycle. Turning overseas, the picture was mixed last night in Asia (Tokyo -0.15%, China +0.35%, HK -0.1%, Korea +0.5%, India -0.4%) and is mixed this morning in Europe (Germany -0.8%, France 0.0%, Spain +0.1%) with Germany the obvious outlier. I might argue that is a response to higher-than-expected inflation readings there and concerns that it might drive the ECB tighter. I guess if you look at the curve below from rateprobability.com it does imply slightly tighter policy over time, but that’s really at the margin.

As to US futures, at this hour (7:10) they are pointing slightly softer, -0.2% or so.

Of course, Friday was much more exciting for the bond market but this morning Treasury yields are unchanged from the Friday close. Europe, however, has seen yields climb higher with continental sovereigns all higher by 3bps.

Finally, the dollar, which rallied sharply on Friday is giving back some of those gains with USDJPY back below 160, having closed above that level on Friday, while the bulk of the G10 currencies have gained between 0.1% and 0.2%. The one exception here has been KRW (+0.7%) which has been on a remarkable roll over the past two months. Between efforts to internationalize the currency and repatriation by the big semiconductor producers, the won has risen ~12% in the past two months, largely in a straight line.

Source: tradingeconomics.com

On the data front, there is nothing today but there is a big week coming culminating in NFP on Friday.

Tuesday	ISM Manufacturing	55.2
	ISM Prices Paid	72.0
	JOLTs Job Openings	7.3M
Wednesday	ADP Employment	47K
	Factory Orders	0.6%
	-ex Transport	0.2%
	Fed’s Beige Book
Thursday	Trade Balance	-$90.0B
	Initial Claims	205K
	Continuing Claims	1816K
	Nonfarm Productivity	1.4%
	Unit Labor Costs	1.3%
	ISM Services	54.3
Friday	Nonfarm Payrolls	58K
	Private Payrolls	58K
	Manufacturing Payrolls	5K
	Unemployment Rate	4.1%
	Average Hourly Earnings	0.3% (3.0% Y/Y)
	Average Weekly Hours	34.4
	Participation Rate	61.4%

Source: tradingeconomics.com

In addition to this, we hear from three Fed speakers. The data we have seen of late indicates that the economy remains quite resilient in the face of higher energy prices. Corporate earnings remain on fire and that continues to underpin risk assets overall. However, all eyes will be on Friday’s NFP as that will serve to reconfirm prior opinions or perhaps change them. The hawks will have a hard time making their case if the number is weak, and similarly, the doves if it is strong. One little noticed thing from Friday was the NFP revisions for the 12 months from April 2025 through March 2026, which were revised lower by ‘just’ 79K. Last year, the revision was -911K, so if nothing else, the BLS counted better! But this begs the question, if the population is not growing, or even shrinking after all the deportations, and Baby boomers are retiring, thus reducing headcount, how many jobs are needed to maintain strong economic output?

It makes a great deal of sense that Chairman Warsh wants to rethink the data because it does feel like the current data is outdated when it arrives, and that does not help forward looking policy decisions. As to today’s session, it is hard to get too excited about anything right now, certainly in the FX markets.

Good luck

Adf

Some Despair

Posted on August 18, 2026 by fxpoet

The story of late is the Bond
Where holders are now all despond
As governments spend
On infinite end
And traders are now far less fond

One question is, what will they buy?
With funds that, to bonds, don’t apply
Are stocks on their list?
With gold, will they tryst?
Or keep it in cash til they die?

As well, one must ask if the Chair
Is comfy or has some despair
Perhaps in his speech
Next Friday he’ll preach
He’ll offer more than laissez-faire

The bond market is where the narrative has turned as yields have broken above multi-year highs and apocalyptic scenarios are a dime a dozen. As you can see from the chart below from Yahoo Finance, the last time the 30-year yield touched its current yield of 5.31% was June 2007 and the last time it closed at this level or higher was June 2004. That’s a pretty long time.

So, is this the aberration or is this the norm? I guess the answer to that question is; how do you define the norm? If you look at the very left edge of the chart above, in February 1985, the 30-year yield reached 11.9%, and in truth, was higher than that before then. This was the legacy of Paul Volcker’s attack on the rampant inflation he inherited when he sat down in the Fed Chair. While many of you will not remember, I’m sure you have all heard of his willingness to drive interest rates higher (which he did by withdrawing bank reserves from the market, not unilaterally raising interest rates like the Fed does today) until such time as inflation cracked. This resulted in the twin recessions early in the 1980’s and made life very difficult for small businesses around the country. But it was effective. As you can see in the chart below I constructed from FRED data, the average CPI during Volcker’s term was 6.17%, and although it did briefly dip below 2%, it finished right around 4%.

But what his actions did was create the prerequisite for a 40-year bond market rally, where prices rose and yields declined. That bottomed in 2020 during Covid and has since reversed course. Now, I think it is fair to say that the Covid year was an aberration as the Fed executed QE on steroids, pumping up their balance sheet by about $4 trillion. Of course, in the wake of the GFC, the Fed quadrupled their balance sheet from ~$1 trillion to ~$4 trillion prior to Covid as you can see in the below chart from FRED.

During the pre-Covid period, measured inflation never rose very high at all, in fact many Fed members, including Chairs Bernanke, Yellen and Powell, all expressed concern about “too low” inflation! The answer to this seeming conundrum was that all that money flowed into financial markets thus inflating asset prices, not consumable prices. But when the government handed out stimulus checks, three times, during Covid and the aftermath, as well as PPP loans and increased jobless benefits, the more recent $4 trillion of QE came rushing into the real economy and we experienced too much money chasing too few goods and services, which drove the dramatic rise in CPI in 2021-2022, something which we all still experience.

But the question remains, are 4% bond yields the norm? 5%? 6%? A rule of thumb from my early days in the markets, which was back in the mid 1980’s, was that the 10-year yield should approximate the nominal GDP growth rate, which given a ‘normal’ yield curve, would imply that the 30-year yield should be somewhere between 50bps and 100bps above that level. In the current ‘run it hot’ paradigm, where virtually every Western country is borrowing and spending money aggressively, and where nominal GDP just printed at 7.9% in Q2 (it was 5.8% in Q1), it is not hard to make the case that the 30-year bond yield remains ‘cheap’.

Of course, it has been a long time since that heuristic was widely known, and almost all market participants today have never lived in that world. In fact, most traders on major bank and fund desks, started their careers after the GFC so have no experience with the previous monetary regime.

Let’s cut to the chase. Is this the end of the world? Absolutely not, as I have shown, it’s not even an unusual place for yields. Are financial markets going to benefit from this? Probably not too much, at least not universally. There will be sectors that do well and others that suffer under a higher rate regime. Will the economy suffer? So far, it has shown impressive resilience, but that is a consequence of the ‘run it hot’ thesis. If that stops or even slows down if Congress reduces its spending (as if!), then I imagine we will see equity markets suffer pretty significantly alongside bonds. The current situation remains fragile, and while Chairman Warsh is trying to instill some antifragility to the market by forcing traders and investors to think for themselves, thus reducing their risk profiles, it is likely to get pretty bumpy if he succeeds.

So, how is this impacting markets around the world? Let’s take a tour. Yesterday’s modest weakness in the US was followed by a generally weak session in Asia (Tokyo -2.5%, China -0.3%, Korea -1.5%, India -0.6%, Taiwan -1.2%) with Tech obviously under pressure, although HK managed to stay unchanged and New Zealand (+1.0%) saw fit to rally on stronger commodity prices. In Europe this morning, bourses are lackluster with Germany, France and Italy all lower while Spain has edged higher and the UK is little changed after GDP data met expectations. US futures, though, are under pressure this morning led by the NASDAQ (-1.3%) at this hour (7:55).

In the bond market, yields are higher around the world with Treasuries (+2bps) performing slightly better than European sovereigns (+4bps across the board) although Gilts and JGBs are also only higher by 2bps. It does appear that bond investors are starting to get antsy about things, but history tells us things will need to get MUCH worse on the spending/deficit side before governments are forced to change their ways. Certainly, given the concerns over a Democratic sweep in Congress in November, there is no reason to believe that spending will slow.

In the commodity space, oil (+0.6%) is following on yesterday’s gains as uncertainty over the Hormuz situation and increased concern over Ukraine’s attacks on Russian oil infrastructure continue to drive fear in markets. I cannot opine on these things as despite the fact there are voluminous reports, it is nearly impossible to tell signal from noise. As to the metals markets, after a pretty solid session yesterday, they are softer this morning (au -0.5%, Ag -1.0%, Cu -1.0%) although trends continue to develop higher here.

Finally, the dollar continues to be a sleeper overall, with the DXY unchanged on the day and most major currencies doing very little. One aberration is KRW (+0.4%) which has seen some significant investment inflow from real money accounts, part of the reason it has performed so well lately. But spare a moment for the yen (-0.2%) which refuses to strengthen no matter how hard Ueda, Takaichi or Bessent wish it to be so. As you can see from the chart below, the aftermath of the most recent intervention is remarkably similar to the previous bout, (and every bout before that).

Source: tradingeconomics.com

My take is we will continue to see a gradual depreciation in the yen until the BOJ acts decisively (don’t hold your breath for that) or the Fed reverses course and starts cutting. As of this morning, the probability of a September hike in the US is 34% and in Japan it is 79%. We shall see.

On the data front, we get Housing Starts (exp 1.35M), Building Permits (1.37M), IP (0.3%) and Capacity Utilization (76.3%), none of which I expect to move markets. Despite the growing concerns in the bond market, the movement has been quite contained and amid lighter than normal staffing through the summer, I still don’t anticipate a lot of movement. I still think we are waiting for Warsh next Friday before anything big happens.

Good luck

Adf

Does It Matter?

Posted on August 6, 2026 by fxpoet

Much ink has been spilled
Describing intervention
But does it matter?

It is still early days since the joint intervention in USDJPY by the US and Japan, and we know they spent a lot of money, but the question at this point is, has it really changed anything? It is pretty easy to look at the chart below and see the pattern following previous interventions repeating already. Major dollar decline followed by very gradual dollar strength.

Source: tradingeconomics.com

But as I said it is early days. Now, I have made the point that unless more fundamental changes are made in Japan, whether that is reining in spending (which seems highly unlikely) to reduce the budget deficit and ongoing increases in debt issuance, or tightening monetary policy by raising interest rates more aggressively, it strikes me that despite all the headlines, this won’t change the situation that much.

If we use CME JPY futures positions as a proxy for the carry trade, as you can see in the below chart from cotsignal.com, that while we are not at record short positions in the large spec community, we are awfully close.

In fact, it is difficult to see at this point, although the data to be released tomorrow could well show it, much change in the short JPY positioning amongst the speculative set. In fact, I would expect that would be the case to some extent. And yet, as in the first chart, the yen appears to have begun to grind lower again.

Much has been made of the potential ramifications of the fact that the Foreign and International Monetary Authority (FIMA) swap lines were used to fund this intervention rather than Japan simply selling some of its Treasury holdings (remember, it holds some $1.13 trillion), and what it means. Some analysts are claiming Secretary Bessent is concerned over the reaction in the Treasury market if the Japanese sell their bonds and so was trying to prevent any additional pressure there. And perhaps that is correct. We will never really know as Bessent will certainly never admit that.

But let me offer a different, simpler explanation. The BOJ didn’t want to take the losses on their bonds which are probably quite large given where US yields have been. Remember Silicon Valley Bank? So, if the BOJ used a repo facility, they get the cash and don’t take the loss. After all, that is not really a new idea. Yet I haven’t heard a single analyst mention it. I guess it’s not sexy enough. Time will tell if things have really changed, but to my eyes, not yet.

Let’s turn now to Friday’s release
Of Payrolls, where there’s an increase
Expected and if
It comes, folks will sniff
A hike ere the summer does cease

On a subject that has not gotten a lot of press so far this week, tomorrow brings the NFP report where a solid growth in NFP is expected (80K) although yesterday’s ADP Employment number disappointed at just 44K. Remember, since the change in immigration policy and the deportation of several million foreigners, it is becoming dogma that a stable Unemployment Rate can be achieved by simply not losing jobs as opposed to having to keep creating new ones.

In this light, 80K indicates a still solid labor situation. Now, the question at hand is how the market will absorb the data. We continue to see equity market participants focused entirely on the earnings data being released, with macro concerns a distant third place on their worry list. (I imagine oil is second). But for the fixed income market and the newly created Fed watchers, this is a critical piece of information.

The few Fed speakers we have heard this week have all discussed how they are now very focused on inflation (where were they in 2022?) and may need to raise rates if it continues to rise although a look at the Fed funds futures market shows that the probability of a rate hike next month has declined to 55% from two-thirds earlier this week. And while a second hike is still priced in the curve, it has been delayed until next spring from the earlier January expectations.

I find this quite interesting as all the Fed commentary has been hawkish and the data we have seen, notably ISM, continues to show economic strength. So, too, does the corporate earnings data and forecasts, with strength as far as the eye can see. I have no explanation for this change, and, in fairness, it is a bit subtle, but the futures market appears to be pricing in a different outcome than the punditry or at least starting to. We will need to watch this carefully as it may be a harbinger for more substantive changes in the narrative and future price action.

Ok, let’s quickly look at markets. The outstanding performer yesterday was clearly the precious metals space with gold (+4.1% yesterday, +0.3% this morning) having its largest gain since the late March bounce. Whether I draw a trend line or look at the 50-day moving average, it seems like a clear break higher after six weeks of consolidation around the $4000/oz level.

Source: tradingeconomics.com

Silver (-0.5%) had a similar move yesterday while copper (+0.9%) is in the process of making yet more new highs this morning although this move has been far steadier. I’ve seen explanations about how yesterday, the market suddenly realized that inflation was a problem or other such nonsense, but my experience tells me this is more likely a positioning event with new money entering after the markets demonstrated a more certain bottom. In other words, since it couldn’t go down despite bad news, the only direction left was up.

Oil (+1.0%) is almost an afterthought these days, remarkably. There is a lot of discussion about an imminent deal between Oman and Iran on the Strait of Hormuz, but my impression is that the market has pretty much moved beyond that story. EIA inventories rose, inventories at Cushing rose and there is no evidence of shortages anywhere in the West.

In the equity markets, yesterday’s mixed US session was followed by a generally weaker one in Asia (Japan -0.9%, China -0.2%, HK -1.5%, Korea -4.6%) although there were some gainers as well (India +0.5%, Australia +0.5%, Singapore +1.0%, Thailand +0.7%). The tech story continues to be the driver and yesterday was a clear demonstration of tech concerns compared to basic materials bullishness. Europe, though, is firmer this morning led by Spain (+1.1%) and France (+0.6%) after some positive data was released (Spanish IP, French Construction PMI, German Factory Orders) although the DAX (+0.25%) is lagging the group. As to US futures, at this hour (7:40) while the NASDAQ (-0.4%) is lower, the other two indices are firmer by 0.2%.

In the bond market, yields are edging higher this morning with Treasuries (+2bps) leading the way and most European sovereign yields higher by 1bp. While yields across the board are at the high end of their recent ranges (see chart below), they do not appear to be breaking out Although for now, the trend across the board does seem to be modestly higher.

Source: tradingeconmics.com

Finally, the dollar is a bit firmer this morning, but only just. In fact, there is really no currency movement of note to discuss. Brazil cut its SELIC rate to 14.0% as expected and the BRL (+0.3%) is a touch firmer, but really, other than that, 0.1% is today’s story and that is not much of a story.

Today’s data releases include Initial (exp 202K) and Continuing (1790K) Claims as well as Nonfarm Productivity (0.6%) and Unit Labor Costs (2.1%) and that’s really it. There is another speech by St Louis Fed president Alberto Musalem, but we already know he is a hawk, so there will be nothing new there.

While we need to keep our eye on how things play out in the yen, there seem to be fewer stories of interest right now, at least marketwise. Perhaps we are finally in the summer doldrums.

Good luck

Adf

Why People Screech

Posted on August 5, 2026 by fxpoet

Investors enamored with risk
Are active, some might e’en say brisk
In buying up stocks
In very large blocks
And feeling, right now, very frisk-y

But this simply highlights the breach
Twixt markets and why people screech
The ‘conomy’s ailing
And policy’s failing
To help, so for more, they beseech

If you ever wanted to see the definition of the K-shaped economy, there is no more accurate representation than the fact that equity markets are making all-time highs at the same time Socialists are winning elections. Now, I don’t know many voters in Michigan, but I’m pretty sure the ones who have an equity portfolio are not voting for the candidate who wants to abolish the Senate, the Supreme court and the Presidency as well as the police and the Department of War. But here we are, with both the DJIA and the S&P 500 trading to another new all-time high yesterday, although as you can see in the chart below, the NASDAQ is still a few percentage points away from its recent highs and the DSA candidate poised to win the Democratic primary election for US Senator in Michigan. Strange times indeed.

Source: tradingeconomics.com

While there is no doubt that earnings continue to be quite strong, and that is the proximate cause for the equity market rally, earnings are a function of economic activity, so it is highly unlikely they would be so strong without underlying economic strength. The upshot is that we continue to ‘reap’ the benefits of the original Portfolio Balance channel defined by then Fed Chair Ben Bernanke as he began the process of inflating the Fed’s balance sheet and all that liquidity spilled into financial markets rather than the real economy. At this point, we have seen money moving back toward production (I saw that a new steel mill was being built in California, the first new mill there in over 50 years) but it remains the case that more money flows to markets than to production. And that, I would argue, is the crux of the dichotomy that we are currently observing, fabulous wealth being created but an extremely uneven distribution.

Can it, or will it change? It took a long time to create the problem, and I fear it will take a long time to unwind it, although I believe that politicians on both sides of the aisle recognize the problem. And this is the classic case where they have very different solutions. Arguably, the fate of the nation rests on which solutions are implemented, reshoring American industrial capacity, or a state takeover of the means of production and redistribution. You know which side I’m hoping wins out.

But in the meantime, equity markets here are strong as is economic activity, at least as measured by the government, and that has been sufficient to drive market behavior. And that, my friends, is why Wall Street is happy. Well, that and the following headline:

Wall Street bankers’ bonuses set for significant rise

With that in mind, let’s see how markets are behaving. That US strength was followed almost universally in Asia with every major market rallying except Singapore (-0.55%) and Thailand (-0.5%). Otherwise, the gains ranged from +3.7% (Tokyo and Korea) down to +0.25% (HK) with more strong gains above 1.0% than below that level. Tech stocks remain the story and that has been helped along by the latest Hormuz story that indicates a deal is coming soon. Frankly, writing about Hormuz at this point seems absurd given the numerous claims and counterclaims with very little ability for most of us to discern truth from propaganda.

The interesting thing about a tech-led rally is how completely it ignores European bourses with France, Germany and the UK all unchanged on the day, although Spain has managed a modest gain of 0.4%. But I think that gain is a function of the better-than-expected PMI Services number from Spain, 58.3, which is its highest reading in more than 3 years while the rest of Europe managed to basically meet expectations at lower levels. As to US futures, as we await the ISM Services data today (exp 54.5) you will not be surprised that they are higher at this hour (7:45).

Perhaps the bigger story has been bond yields as they have slipped -13bps in the past two sessions and are down -1bp this morning as per the chart below. European sovereign yields have also backed off a bit although this morning they are basically unchanged while JGB yields (-3bps) continue to trade near their recent multi-decade highs. So far, the US-Japanese joint yen intervention has not been enough to change that story.

Source: tradingeconomics.com

In the commodity space, it is the metals markets that are the most interesting this morning with gold (+2.7%) and silver (+4.1%) leading the way as hopes for the Hormuz reopening and the end of the Iran conflict percolate. Either that or people have begun to realize that the demand for metals remains impervious to other stories. Now, I am not a market technician, but frankly, the fact that the gold price is breaking above its 50-day moving average as per the below chart, and the general price action is telling me that we have put in a bottom and seem poised to break higher.

Source: tradingeconomics.com

Copper (+0.4%) continues to trade near its all-time highs and I suspect a move higher in gold and silver will take it along for the ride. As to oil (+0.4%), the fact remains it is lower by -10.0% this week, which has been a key driver of sentiment in markets overall.

Finally, the dollar is a bit softer this morning, but not too much. The euro and pound are both firmer by 0.2% while the yen is little changed along with CHF, CAD and AUD. NZD (-0.4%) is an outlier after weaker than expected jobs data undermined the idea of another rate hike by the RBNZ. In the EMG bloc, most currencies are a bit stronger as well, 0.1% to 0.3% or so with KRW (+0.4%) and CLP (+0.8%) the outliers, with the former continuing its recent trend as you can see from the chart below, while the latter is benefitting from the overall strength of copper.

Source: tradingeconomics.com

And that’s really it for the day. In addition to the ISM data, we do see EIA oil inventories later this morning and we get the Treasury Refunding Announcement at 8:30, although there is no expectation for a massive change in the current issuance schedule. Late this afternoon, the central bank of Brazil is expected to cut the SELIC rate by 25bps to 14.0%, which is arguably why BRL has been such a strong performer all year, very high real interest rates.

As to the dollar writ large, it is on its heels right now and I don’t think Secretary Bessent minds that very much. Using the DXY as the proxy, do not be surprised to see it trade to 97 by the end of summer.

Good luck

Adf

Dust in the Wind

Posted on July 31, 2026 by fxpoet

A line has been drawn
Is it steel reinforced? Or
Just dust in the wind?

Shortly after 9:30 yesterday morning, the BOJ entered the FX market aggressively selling dollars as you can see in the chart below. While the amount sold is unknown at this time, it was likely pretty large, ~$10 billion – $15 billion would be my guess. In addition to the sales, though, apparently the Fed called around the Street “checking rates”, although my understanding is the Treasury didn’t actually sell any dollars.

Source: tradingeconomics.com

Regardless, the signal of an approved, if not joint, intervention is powerful and I expect that the market will take some time before pushing the dollar back higher again. Now, one of the themes yesterday was that the BOJ would also raise interest rates at their meeting last night in a surprise move as a way to reinforce this action. I believe if they had done so, it could have been quite effective and we would have seen another sharp leg lower, as well as an overall reduction in pressure on the yen. But they did nothing with their base rate remaining at 1.0% and, as you can see from the chart, the drift has already begun for the yen to weaken once more.

As I have maintained throughout this process, absent policy changes of substance, and at this point in Japan that includes fiscal as well as monetary, pressure on the yen is very likely going to be the norm. Of course, if the Fed really does begin to ease policy at some point, that will alter opinions and I imagine soften the dollar universally.

The pundits are still really pissed
That Warsh, their concerns, has dismissed
Get ready to hear
That Doomsday is near
If Warsh keeps ignoring their gist

Since we seem to be in an interlude in the war in Iran and the Middle East, so oil markets remain quiet and there has been little news from the White House, the punditry has continued its focus on Fed Chair Warsh and all the things they hate that he is doing. This is well summed up in this morning’s WSJ article titled, ”Kevin Warsh’s Honeymoon with the Bond Market Is Already Over” interestingly, this was not written by Nick Timiraos, but rather by Sam Goldfarb, their bond market guy. Personally, I think he is completely wrong, but the punditry is consistent in their desperate desire for Warsh to tell them what the Fed is going to do so they can report it and seem smart.

However, my read on the bond market response is quite different, especially when put in context with other markets, notably inflation markets. The fact that the 2-year yield has backed off, and we have already seen a modest pull-back in the 10-year tells me that there is limited fear of rampant inflation. While the pundits, and many other central bankers (see Lagarde, Christine) think that hiking rates into an energy price shock is the right move, it has historically been a key policy error. And what we have learned from financial history is that it is NEVER different this time. And the folks who trade inflation have breakevens (the difference between nominal Treasury yields and TIPS yields of the same maturity) trading at very ordinary levels of 2.27% in the 10-year and 2.22% in the 30-year. I thought that Alexandru Stefan Goghiedid an excellent job of describing the situation in his Substack article this morning.

In the meantime, you know who else isn’t really worried about this? Equity investors. Broadly speaking, green is today’s color in that asset class, with some of the real movers not even shown in this Bloomberg Screenshot.

For instance, the KOSPI rallied 17.9% last night after Amazon and Microsoft’s earnings got everybody reconvinced that the AI trade was not over. This is the market that I had been highlighting as collapsing and it just did a major reversal. Last night’s candle, on the right-hand side of the chart, is one of the largest you will ever see in a major equity market!

Source: finance.yahoo.com

So, we have made it through the major tech earnings releases and spirits are still high. While the Fed funds futures markets are still pricing a two-thirds probability of a hike in September and the certainty of one by October, the recent cooler than expected CPI and PCE data will continue to give ammunition to remain on hold. To me the real question is, will Chairman Warsh be able to convince the committee that reducing the balance sheet is the right thing to do (it is) as that will have a much stronger impact on inflation than raising rates into the energy price shock.

In an aside, lately I have been wondering if every Fed governor should be fired for ‘cause’. After all, according to legal precedent, cause can mean:

Inefficiency – persistent inability or incompetence in performing the role’s administrative or official functions
Neglect of duty
Malfeasance in office

Now, I would not accuse them of the latter two, but let’s face it, they have completely failed in their official functions as evidence by the fact that even on their own terms of stable prices, it has been more than 5 years since they have achieved their goal. That seems pretty inefficient or incompetent to me!

Ok, let’s run through the other markets. Bond yields are higher by 1 tick around the world, and we have discussed them already. JGB yields, have slipped -2bps, so maybe they are not as worried with the yen strength from yesterday.

Commodity markets are dull with oil (+1.5%) having rallied in the past hour but still hanging around the $85/bbl level with no new news on the war. At the same time both gold (-1.2%) and silver (-2.0%) are under pressure this morning, although that doesn’t make a huge amount of sense to me given the dollar’s broad weakness. Perhaps the fact that it is month end is driving flows there, but I am not close enough to those markets to know.

Finally, the dollar is softer, having fallen sharply yesterday although bouncing somewhat this morning. As you can see in the DXY chart below, we are back within the 96.50/100.50 range that has prevailed for most of the past year and have traded below 100.00 several times yesterday and early this morning.

Source: tradingeconomics.com

To me, this is very interesting as FX traders seem to be taking different signals from the Fed than the short-term interest rate guys. This does not feel like a market that is anticipating rate hikes in the US. Now, historically, when it comes to opinion differences across markets, FX traders are the worst of the worst. And, of course, I am an FX guy at heart, but I have a feeling they are correct here and I still see no rate hikes this year despite the Fed funds futures markets relative certainty. So, right now, the dollar is broadly firmer by 0.3% across the board with the biggest outlier KRW (-1.35%) seeming to follow the KOSPI.

I think the really important thing to remember here is that the dollar has just not done very much, at least against the G10 currencies, for more than a year. Certainly, LATAM currencies have performed well this year, but it remains difficult for me to look at the rest of the G10, a group with weak economic activity, and get excited about owning any of them.

On the data front, the PCE data was as expected to softer, but the real key yesterday was the GDP data which showed nominal GDP rose 7.9%, although the inflation adjusted number was just 1.5%. But this is the very essence of running it hot, high nominal growth, which consisted of significant consumption and investment, while allowing inflation to run as well. From a debt management perspective for the US, the debt/GDP ratio fell accordingly by about 1%. While this trend remains higher, I expect we will see more of this type of outcome going forward.

As to today’s releases, Chicago PMI (ep 56.0) and Michigan Sentiment (54.0) are what we see, neither of which seems likely to matter to markets. The equity bulls are back and that is going to be today’s story. If those rallies fail, it will portend larger problems I believe, but my take is that is not going to happen. I guess we shall see.

Good luck and good weekend

Adf

The Die Isn’t Cast

Posted on July 29, 2026 by fxpoet

This morning, investors don’t know
Exactly which way things will go
Unlike in the past
The die isn’t cast
So, some pundits will eat some crow

The question is how will the Fed
Explain how they’re looking ahead?
If Warsh has his way
There’s not much they’ll say
But others, more views, want to spread

As market participants prepare for today’s FOMC statement with the potential for a rate hike, as well as the ensuing press conference, I cannot help but marvel at the recent increase in analysts doing their jobs and being forced to think about what can happen. This is the healthiest thing about this process I believe. It is also a very different approach than some current FOMC members have taken as they seem quite dismissive of the process. For instance, in the WSJ article I cited yesterday, I want to highlight this paragraph;

“Governor Christopher Waller, a former economics professor with a reputation for saying what others won’t, put Warsh on the spot, according to several people familiar with the dinner. What’s the point of all this, he asked. Tell me who you’re putting on these groups, he said, and I’ll tell you what they’ll say. There were no brilliant ideas out there that everyone had somehow missed.”

This is the very definition of hubris, Governor Waller saying he already has all the ideas and, essentially, the task forces are a waste of time. Every member of the FOMC and every one of the 300+ or 500+ or however many PhDs who work there are Neo Keynesians and all see the world in exactly the same way. In fact, they clearly believe that their collective view is the ‘only’ view that is correct. And yet they have failed at their mission statement for more than 5 straight years. My take is they are all terribly frightened that other ideas will not only be more effective, but that they will demonstrate all the mistakes the current FOMC has made prior to Chairman Warsh’s appointment.

As of 6:45 this morning, the currently priced probability for a hike, as per the Fed funds futures market, is ~38%, an unusual amount of uncertainty on the day of the meeting. However, as you can see from the table below, there is virtual certainty of a hike in September and a high probability of one in December as well. Personally, I disagree they will hike at all this year, but that is what makes markets.

Source: cmegroup.com

It has been two years since there has been this much uncertainty ahead of the meeting, and back then it was a question of 25bps or 50bps as a cut, which I would argue is qualitatively different then determining if there would be any action at all. Otherwise, you need to go back quite a while to see this type of uncertainty, pre-GFC and the beginning of forward guidance.

Meanwhile, the other story of note is the Iranian attack on a US air base in Jordan and renewed fighting in the Gulf region, more than simply in Iran, which has oil prices rebounding sharply from yesterday’s lows, up 5.0% this morning. The biggest problem with the oil market, from a market perspective, is that it is all headline risk, whether more attacks, peace talks or some other comment from either President Trump or Iran. The one thing of which I am certain is that this conflict will not last forever and that when it is over, oil prices will fall back sharply and that over time, the Strait of Hormuz will see its transits decrease to ~5% of the global oil market, making it largely irrelevant to the conversation.

Which takes us to the market activity overnight. Semiconductor companies continue to have some serious problems as SK Hynix reported earnings last night, which, while they beat expectations, their guidance was weaker than expected. Given what we have seen from the sector lately, it cannot be a surprise that the KOSPI fell another -6.0% last night. The chart below shows the relative performance of the KOSPI and NASDAQ over the past 5 years, and I have highlighted the peak. As you can see, the KOSPI massively outperformed (and we thought the NASDAQ was a bubble!) although it is falling back to earth rapidly. In fact, YTD, it is only higher by 34.4%, after having nearly doubled at the peak.

Source: Bloomberg.com

Elsewhere in Asia, Taiwan (-3.8%) also suffered as did the Nikkei (-1.5%) although other Japanese indices held up just fine. China (+0.7%) and HK (+2.0%) had solid sessions and most of the rest of the region performed reasonably well. Remember, once we get past the Fed today, all eyes will turn to Tokyo for the BOJ meeting which comes Friday.

In Europe, it is a mixed picture with concerns over the rising oil price driving some of the concern as we have also seen yields back up a bit. Spain’s IBEX (-1.5%) is the laggard, but that appears to be a profit taking situation as the market there had rallied to record highs recently. Elsewhere, France (-0.5%) is soft while the UK (+0.3%) is picking up slightly after some positive housing news and Consumer Credit activity while the DAX is little changed. As to US futures, at this hour (7:40) they are edging higher, 0.25% or so.

As I mentioned, yields are backing up this morning with Treasuries (+2bps) outperforming vs. European sovereigns which are all higher by between 3bps and 4bps. This seems entirely a reaction to the rebound in oil prices as there has not been enough other news to matter.

Metals markets are having another session where the relationship with oil is askew. Gold is unchanged this morning while silver (+1.0%) has edged higher despite the oil rally. But these metals remain in a downtrend trading in virtual lockstep as per the chart below.

Source: tradingeconomics.com

Finally, the dollar is mixed this morning, depending on which counterpart you watch. The DXY (-0.1%) is a touch softer although there has not been much movement at all in the euro, pound or yen. In the G10, AUD (-0.5%) is the worst performer after inflation data overnight was cooler than expected and the probability of a rate hike fell even further. NOK (+0.3%) is responding to oil’s rebound and everything else is minimal. In the EMG, ZAR (-0.5%) is the laggard du jour on the higher oil prices although in fairness, it is holding its own vs. the gold price, having only declined about 2.5% in the past six months despite the sharp, 25% decline in the price of gold.

You can be sure that after the FOMC today, all eyes will turn to the BOJ and the yen as the next major discussion point for the FX markets.

And that’s really it today. The only data is the EIA oil inventories with a small draw expected. And of course, the FOMC this afternoon. My take is not much will happen ahead of 2:00, but remember, a large portion of the market has their bet wrong as to the outcome, so if nothing else, expect some volatility in the aftermath.

Good luck

Adf

Far From Dead

Posted on July 28, 2026 by fxpoet

Tomorrow we’ll hear from the Fed
With pundits not sure where they’ll tread
Some call for a hike
So, Warsh can out psych
Inflation that seems far from dead

But others claim hikes he will thwart
Awaiting the task force report
With oil retreating, 
Though some call it fleeting,
The hawks he will likely abort

The one thing we cannot forget
Is all of the outstanding debt
A hike may create
A weaker growth rate
An outcome he’ll surely regret

Let us turn out attention to the FOMC meeting which begins today and culminates in tomorrow’s policy statement and then the press conference that ensues. On the whole, I would say that Chairman Warsh has already achieved a key objective, market uncertainty about the outcome. A point I have been making for a very long time is that uncertainty is what creates an anti-fragile market as positioning is inevitably reduced, and more importantly, so is leverage. And this is true in every market. While there may have been value in forward guidance at the onset of the GFC such that the Fed wanted to calm markets down, that time is long past.

Interestingly, perhaps the one individual who is unhappiest is Nick Timiraos at the WSJ, the former Fed whisperer. He exhibited great power in the market because he was seen as former Chairman Powell’s mouthpiece when Powell wanted to convey information without being directly attributed. However, it appears that there will be no Fed whisperer in a Warsh Fed, although I suspect even if there is someone, it will not be Powell’s man to whom Warsh turns. So Timiraos is on the outs anyway. But you can tell how unhappy he is by the tone of his recent articles like the one last night trying to insinuate that Warsh will not get his way.

At the same time, Bloomberg has an article this morning explaining how Citadel Securities’ chief economist is expecting a hike. In my opinion, this is how it should be. Wall Street economists and analysts make enough money that they should be able to do the work themselves and have their own opinions, not merely regurgitate what they hear from the Fed speakers. (After all, I make no money and have opinions!)

Reiterating my view quickly, I do not see a hike for the following reasons:

Recent data releases point to cooling inflation offering a respite on concerns of runaway prices
Delaying any action until the task forces complete their work and help reset the way the Fed approaches things feels like the goal
The Federal government cannot afford a rate hike as they migrate more and more issuance to the short end of the curve that will directly be impacted.

The counter view basically revolves around the idea that Warsh can ‘earn’ market credibility by hiking now, whether or not it is a policy error. I don’t think he is concerned about losing credibility at this stage and has set the table, via the task forces, to show he means business when it comes to changing the Fed. We all find out tomorrow.

As traders await all the news
On earnings, it seems there are views
That AI is losing
Its luster and cruising
Toward outcomes where stocks sing the blues

In my discussion about parabolic markets yesterday, I mentioned the Korean KOSPI index but after last night’s price action, I think a picture is in order. This from wolfstreet.com.

As I explained, parabolic moves do not end in a range, they fall like the chart above with pullbacks greater than 50% the norm. This implies that the KOSPI is not done yet, and given the KOSPI is basically two stocks, Samsung and SK Hynix, both of which are major semiconductor manufacturers, it doesn’t speak well to the semiconductor space in the US either. Tomorrow, we hear from MSFT and META and then Thursday we get AAPL and AMZN earnings reports. My take is much is riding on these earnings reports as any indication that growth is starting to slip will feed into my discussion yesterday regarding the second derivative and how that is the driver. In fact, we saw the announcement yesterday by Nvidia that they were guaranteeing $250 billion of debt for OpenAI to build a new datacenter in Ohio. At cycle ends, the pace of activity tends to increase as the players want to get things done before the collapse. I fear that is what we are watching.

Ok, let’s look at markets. As I’ve already touched on the KOSPI, which fell -10.8% last night, it is not surprising that most of the rest of Asia had a rough go as well. Tokyo (-4.0%), Taiwan (-4.65%) and China (-2.8%) were the biggest losers overnight although HK (+0.4%) managed to eke out some gains. In fact, looking across the region, away from the big three mentioned above, it was a more mixed picture. Indonesia (-0.9%) is having its own problems as the central bank governor resigned and there have been numerous scandals and other cabinet resignations lately undermining both the rupiah (-0.1% and back to multidecade lows) and the stock market there.

As to Europe, given they have no tech sector and the tech sector is the area under the most pressure, I guess we should not be surprised that bourses there are modestly higher this morning, mostly up around +0.3% across the board. A very pleasant experience compared to the gyrations seen elsewhere. And US futures at this hour (7:10) are mixed with NASDAQ (-1.1%) suffering while the DJIA (+0.5%) is fine and the SPX is caught in the middle, basically unchanged.

In the bond market, yields continue to edge lower, with Treasuries (-3bps) leading the way and European sovereign yields all lower between -1bp and -2bps. UK gilts (-3bps) are also performing well as the market awaits the BOE’s policy decision on Thursday. Then JGB yields (-2bps) have slipped in concert as the market awaits the BOJ decision Friday. At this point, consensus across the board is for no movement, although there has been a discussion regarding the BOJ with some analysts believing a hike is possible.

Turning to commodities, oil (-1.6%) is not the center of attention today for once, and is pushing back toward $80/bbl. The ongoing decline appears to be based on comments that diplomacy is once again being tried to resolve the Iran situation and the Strait of Hormuz. Perhaps more surprisingly the metals markets are also falling this morning (Au -1.3%, Ag -2.2%, Cu -1.1%) as their inverse relationship with oil is being tested.

Finally, the dollar is ever so slightly firmer this morning, but mostly on the order of 0.1% or 0.2%. AUD (-0.4%) is the worst performer in either G10 or EMG blocs as central bank comments led to a reduction in the probability of a rate hike there next month. One other thing to note is USDJPY, where, as I type, the market is trading at 163.92, a scant 8 pips from the next big, round number at 164.00, a level almost touched last Thursday (163.99 was the high) but when it trades, it will almost certainly be hailed as an important milestone regarding potential intervention. I don’t agree with that assessment.

Source: tradingeconomics.com

Again, a key feature of BOJ intervention has been an effort to address a volatile market, but as you can see below, while the direction of travel has been consistent, the only volatility has come from BOJ interventions. Everything else is a slow, steady deterioration of the yen.

Source: tradingeconomics.com

On the data front, there is plenty upcoming this week in addition to the Fed, including PCE on Thursday.

Today	Goods Trade Balance	-$100.0B
	Case-Shiller Home Prices	1.3%
	Consumer Confidence	92.3
Wednesday	FOMC Decision	3.75% (unchanged)
Thursday	BOE Rate Decision	3.75% (unchanged)
	Initial Claims	200K
	Continuing Claims	1800K
	Q2 GDP	2.1%
	Personal Income	0.3%
	Personal Spending	0.3%
	PCE	-0.1% (3.7% Y/Y)
	Core PCE	0.2% (3.3% Y/Y)
Friday	BOJ Rate Decision	1.0% (unchanged)
	Employment Cost Index	0.8%
	Chicago PMI	56.0
	Michigan Sentiment	54.0

Source: tradingeconomics.com

Obviously, the FOMC meeting will be the big story along with the earnings data, although I imagine that the PCE data may garner some interest for now, at least until we learn what measures of inflation the Fed is going to use going forward. My fear is the equity market can crack, for now, and that will drive overall trading activity. As to the dollar, I see no reason for a large move in either direction until we see new policies.

Good luck

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Explaining the rhyme and rhythm of the FX markets each day

Tag Archives: stock-market

Da Bomb

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Hike!

Some Despair

Does It Matter?

Why People Screech

Dust in the Wind

The Die Isn’t Cast

Far From Dead