Tag Archives: stock-market

No Black Swan

Posted on by 
For all of the angst that Iran
Has ended the talks and moved on
The market for oil
Has come off the boil
As risk takers see no black swan

So, stocks keep on making new highs
And it cannot be a surprise
That bond yields have slipped
While in today’s script
Elections will garner all eyes

Once again, I am having a hard time reconciling the narrative and the price action.  Yesterday saw a sharp rally in oil as the talks between the US and whoever is representing Iran apparently collapsed.  Yet, as you can see from the below chart, while that was worth nearly $5/bbl early in yesterday’s session, those gains dissipated over time and this morning, oil (-1.2%) continues that slide.

Source: tradingeconomics.com

One thing I saw on X this morning claimed Iran was done talking, had received a nuclear bomb from a third party (Pakistan? North Korea?) and was going to detonate it somewhere.  Another was that the talks are still ongoing.  I do find it interesting that so many are willing to take statements from the Iranian news agency, TASNIM, a body that has lied repeatedly for 47 years, and assume their claims are gospel.  Propaganda is always an ongoing project on both sides (in truth from every government everywhere) and thus every claim must be seen for what it is, speaking to a specific audience to achieve a response, not an unbiased description of reality.  Thus, it seems many folks see what they want to see to confirm their prior beliefs.  I come back to the market as the most unbiased arbiter, and it continues to point to an end to the conflict on a relatively short timeline.

Which takes us to the other story today, US primary elections, notably in California where there is a gubernatorial primary and a mayoral one in LA that has garnered the most attention based on the seeming outstanding performance of former reality-TV star (?) Spencer Pratt running against the incumbent Karen Bass.  This race seems like it may be quite important nationally as it would offer the possibility that the deepest blue of cities may finally have had enough incompetence in the mayor’s office and wants to change directions, at least a little bit.  Of course, NY just elected an incompetent mayor, as did Seattle and Chicago before them, so maybe the people in these cities like the situation.  I’m hopeful that is not the case.

But otherwise, it is hard to get too excited about much this morning.  equity markets in the US made yet another set of new highs yesterday across the major indices as no matter the news, it appears there is a bullish spin.  So, let’s turn to markets this morning.  Asian equity markets were mixed overnight with Tokyo (-0.3%) slipping slightly although HK (+2.5%) and China (+1.5%) both rallied nicely on the back of the US tech rally.  Net, there were far more winners in the region (Korea, India, Taiwan, Philippines, Thailand, Singapore, Indonesia), than laggards (Australia, New Zealand, Malaysia) with the laggards barely slipping at all.  So, despite all the angst over Asian nations running out of oil and oil products, equity investors are all in there!

In Europe, it’s happy days as well as per the below Bloomberg screenshot.

This is despite Eurozone inflation rising to 3.2%, its highest level since September 2023, and, as per the below chart, certainly looking like it is beginning to trend higher on the back of 3+ months of higher oil prices feeding through the entire economy.

Source: tradingeconomics.com

Of course, given Eurozone GDP is indistinguishable from zero (see below chart), and has been for 3 years, it is fair to wonder if this is setting up to be a particularly egregious central banking error by Madame Lagarde.  

Source: tradingeconomics.com

Too, while short-term inflation expectations have unsurprisingly risen, a look at the 5-year result shows limited concern by consumers.  As an aside, there is good reason to believe that inflation expectations are irrelevant in future inflation readings, at least according to the academic literature, but it is a driving force in current central banking models, so needs to be considered.

In the end, though, the ECB is going to hike rates next week, on that you can depend, and if when economic activity declines, they will blame Putin or Trump or Elon or anything but their own failed policies.

As to US futures at this hour (7:10), they are modestly lower, maybe -0.2% or so across the board.

In the bond market, Treasury yields have fallen back -3bps this morning after round-tripping 5bps higher yesterday and finishing the day unchanged.  European sovereign yields are having a better day, with declines of -6bps to -7bps across the continent and JGB yields (-11bps) are really falling.  My conclusion is that investor concerns over runaway inflation simply do not exist despite the narrative pushing that story.  The ostensible crises in May apparently never arrived, at least not yet.

In the commodity market, it can be no surprise that metals prices (Au +1.0%, Ag +1.8%, Cu +1.0%) are higher this morning given the overall risk environment.  The negative correlation between metals and oil remains largely intact for now.  The interesting thing to note, though, is that despite the daily gyrations, in reality, neither oil nor the precious metals have gone anywhere in a while.  The same is not true for copper which is at new all-time highs.

Finally, the dollar is modestly softer this morning, on the order of 0.1% against its G10 counterparts with AUD (+0.3%) the best performer.  In the EMG bloc, ZAR (+0.6%) is responding to the combination of lower oil and higher gold prices and MXN (+0.4%) is also having a pretty good session, but that seems more like beta vs. the dollar than anything else.  I would be remiss if I didn’t spotlight JPY (0.0%) which continues to edge closer to the 160.00 level as per the below chart, but was also the subject of much discussion as FinMin Katayama was out explaining that, “As for foreign exchange, we continue to maintain our stance that we stand ready to take appropriate action at any time, as needed.”  However, while the market expects a 25bp rate hike in two weeks, that is already in the price.  In order to stop the yen’s slide, they will need to really change policy, something which I maintain is not in the cards for now.

Source: tradingeconomics.com

On the data front, this morning brings only the JOLTs Job Openings (exp 6.88M), essentially unchanged from last month.  Yesterday’s ISM Manufacturing data was quite solid across the board except for the employment subindex, which remains lackluster as companies expand with more automation.

I think it is fair to say nobody knows what will happen in the Iran conflict nor the timing.  While markets can be completely wrong, and forced to reprice suddenly, that is an extremely rare occurrence.  Too, the one thing on which we can count is if something hugely negative occurs, central banks around the world will step in, add liquidity and cut rates, to ameliorate the slide.  My point is, I will not bet against the market view that this will end sooner rather than later.

Good luck

Adf

Tough Call

Posted on by 
The peace talks have yet to conclude
And yesterday, both sides pursued
A little more fighting
Despite the gaslighting
Which helped push the price up in crude

But it still remains far below
The levels where it needs to go
To foster more drilling
And help in refilling
The buffers from which barrels flow

As we start the week, oil prices have rebounded from last week’s close (as per the below chart) as progress on the peace talks remains slow, at best, and there was another series of military attacks by both sides, with each side claiming defensive maneuvers. 

Source: tradingeconomics.com

Now, I am not a military scholar, but firing missiles at another nation doesn’t sound defensive, rather I would use the word retaliatory.  And there is no way we can know who initiated what during the latest exchange, as both sides claim the other did and there is no neutral arbiter.  But my take is that there is still a way to go before this is over.  Certainly, the IRGC seems committed to the last man, at least for now, and President Trump has indicated he is in no hurry.  Personally, I am still thinking a July 4th resolution timeline.

I did, however, see an increase in the discussion about the imminent collapse of supplies and the estimates that oil prices will finally (?) head up to the $150-$200/bbl level that a number of pundits have forecast.  But looking through these X posts, they are retweeting the comments I posted on Friday from the Exxon SVP Neil Chapman.  Time will tell if they are correct and the changes in the system have not been sufficient, at least not yet, to address the reduction of available oil from the Gulf.  But so far, whatever calculations have been made regarding demand destruction and additional production elsewhere, plus the rerouting of oil away from the Strait has been sufficient to prevent the worst-case scenarios that have been painted since this began back in March.  Plus, the one thing of which I am highly confident is that going forward, the Strait of Hormuz will not be nearly as strategic as it currently seems.  Production elsewhere and pipelines will reduce its importance dramatically.

The BOJ meets
In two weeks’ time.  Do rate hikes
Still matter? Tough call.

Two weeks from tomorrow, the BOJ meets to discuss monetary policy with the backdrop that the yen is essentially back to the levels seen in April just before the most recent bout of intervention.

Source: tradingeconomics.com

The swaps market is pricing in a 78% probability of a 25bp rate hike, which would take the base rate to 1.00%, still amongst the lowest in the world, but its highest level since September 1995 as you can see below in the chart from tradingview.com

Think about that for a moment, interest rates in Japan have been below 1.0% for more than 30 years.  That is an extraordinary situation.  Consider the bubble that was blown in the US by having rates that low for ‘only’ a decade following the GFC, or for an even shorter time post-Covid.  I guess we need to ask why Japanese equities never inflated the same way.  Perhaps that is the best evidence of the financialization of the US economy vs. that of Japan.  Liquidity in Japan didn’t lead to FOMO of the latest investment thesis.

Nonetheless, my take is there is a modest fear about the yen weakening much further and so the BOJ will hike rates.  Alas, since the market is already priced for that outcome, it is not clear it will do much to moderate the yen’s weakness, at least if they only go 25bps.  Now, if they hike 50bps and explain more hikes are on the way, that will matter.  The problem with that theory is that the latest CPI reading in Japan was 1.4%, well below their 2.0% target, and it has been that way since January as per the below chart.  It seems it could be tricky for Ueda-san to explain a very aggressive rate hike with the current inflation reading.

Source: tradingeconomics.com

Ok, I think those are the stories of note so let’s review market activity overnight.  let’s finish with commodities where oil’s gains (+3.6%) are not having the typical response in the metals markets with gold ‘only’ lower by -0.8% and silver (+0.6%) and copper (+2.5%) higher.  I don’t believe we are at the point where these markets are truly independent, but perhaps some of this negative correlation has been overdone.

In the FX markets, the dollar is modestly higher vs. most of its G10 counterparts with NZD (-0.6%) the laggard, but the rest of the group mostly softer by between -0.1% and -0.2%.  In other words, not too significant, and this includes the yen (-0.1%).  I believe all the yen talk is based on the idea that the BOJ meeting is close enough that it is a topic of conversation in a dull market.  Now, if the yen were to weaken dramatically ahead of the meeting, that would certainly change some views.  As to the EMG bloc, it is a bit more mixed although movement, overall, remains muted.  BRL (+0.4%) is the biggest winner with no particular newsworthy events to note, but when looking at the chart, it really hasn’t done too much since the middle of last month when the news about Lula’s competition broke with Bolsonaro fils suddenly less likely to compete for president.

Source: tradingeconomics.com

But otherwise, it is a mix of gainers and laggards on the order of 0.1% to 0.3% in either direction.

In the bond market, yields have ticked higher everywhere following oil’s rebound with Treasury yields higher by 2bps and most of Europe higher by 4bps.  US yields continue to drive the global situation, certainly directionally, if not in magnitude.  

Finally, equity markets appear quite sanguine regarding the oil price rise as Asian markets saw a mix of gainers (Tokyo +0.9%, HK +0.9%, Korea +3.7%! Taiwan +1.4%, Singapore +1.0%) and laggards (China -1.0%, India -0.7%) although clearly far more positive than negative.  Meanwhile, in Europe, the picture is mixed but with much less movement as Germany (+0.4%) and France (+0.1%) edge higher while Spain (-0.2%) and the UK (-0.2%) both slipped.  The news here was the PMI data which largely declined from last month, but not quite as far as forecast.  At this hour (7:30) US futures are all pointing higher between 0.2% and 0.6%.

On the data front, as it is the beginning of a new month, we get plenty including the NFP report on Friday.

TodayISM Manufacturing53.0
 ISM Prices Paid85.5
TuesdayJOLTs Job Openings6.82M
WednesdayADP Employment110K
 ISM Services53.7
 Factory Orders4.6%
 -ex Transport0.8%
ThursdayInitial Claims213K
 Continuing Claims1790K
 Nonfarm Productivity0.8%
 Unit Labor Costs2.3%
FridayNonfarm Payrolls85K
 Private Payrolls78K
 Manufacturing Payrolls0K
 Unemployment Rate4.3%
 Average Hourly Earnings0.3% (3.4% Y/Y)
 Average Weekly Hours34.3
 Participation Rate61.7%
 Consumer Credit$16.0B

Source: tradingeconomics.com

The labor market is certainly confusing compared to what many of us have known throughout our careers.  It is obvious the change in immigration stance by this administration has had a major impact, but so, too, has AI and company responses to that.  I continue to read bifurcated takes on AI either destroying everybody’s jobs or creating many new ones with both sides absolutely certain of the outcome.  One thing I will note is that while the BLS NFP numbers have been subject to major revisions given the inadequacies of the birth/death model for small businesses, I wonder about the ADP data, which I understand is a count of all the paychecks they distribute.  But that data also gets revised, so there is no perfect solution.  What I do think is clear is that less new jobs are necessary to maintain the Unemployment Rate at levels which, in the past, would have been deemed a huge success for the Fed and government.

As to today, headline bingo remains the biggest risk, but there is an awful lot of belief that the equity train rolls on and with it, so too with the dollar’s broad strength in my view as funds flow into the US to hop on board.

Good luck

Adf

To Sink or To Climb

Posted on by 
While talks about peace seem to be
In limbo, from what I can see
The threats from each side
Are not bona fide
But rather, the talks’ apogee

So, markets are biding their time
Not sure if to sink or to climb
Thus, things that have rallied
Have all dilly-dallied
While laggards change their paradigm

The dichotomy between the increased intensity of the recent threats from both the US and IRGC and the lack of market response to those threats is quite interesting.  After President Trump responded to a question thusly, “I hope we don’t have to do the war, but we may have to give them another big hit,” the IRGC responded in kind, “If the aggression against Iran is repeated, the regional war that was promised will this time go beyond the borders of the region, and you will be dealt crushing blows in places you do not expect, and you will fall into the abyss of defeat and destruction.”

Once again, I am neither in the situation room nor in Vahidi’s cave, so can only observe from a distance, however, my take is elevated threats on both sides indicate a play to the home crowd showing how tough both sides are being in the negotiations as those talks find a conclusion.  Now, it is possible that Vahidi is truly apocalyptic and doesn’t care, but again, it is very difficult to believe that someone would strive to reach the pinnacle of power in a nation just to destroy it.  

But it is more than my amateur psychology that leads me to this belief, it is the fact that the oil market continues to behave as though things are going to be corrected fairly soon.  Once again, I understand markets can be wrong and misprice things, but there just does not appear to be an actual dearth of oil around the world right now.  Certainly, there are some places suffering more than others, but it is not universal.  And if I look at the chart of WTI below, $100/bbl keeps coming back as a “home” of sorts and has since the conflict began.  Thus, my view has become that by July 4th, as an appropriate date for President Trump, Hormuz will have reopened and there will be a deal on the nuclear material.  In the meantime, alternative routes for oil delivery out of the gulf are being developed post haste.  None of this has changed my view that oil’s price is driven by politics, not geology.

Source: tradingeconomics.com

Turning to the FX market, I thought I might take a trip down memory lane regarding the dollar.  You may recall at the beginning of 2025 when the dollar slid about 10% and there were breathless takes about the end of the dollar and how this was unprecedented in such a short period of time.  You can see the move as the farther right trend line in the chart below.

Source: tradingeconomics.com

The other trendline is steeper (i.e. the dollar fell more rapidly) and that happened just two years prior.  Now, the beginning of 2025 was right at President Trump’s inauguration and one of the main narratives at the time was that he would like to see the dollar weaken to enhance the competitiveness of US manufacturers, but pundits, to highlight the unusual nature of the move, clung to the idea that it was the sharpest decline in the dollar at the beginning of the year since sometime in the 1980’s.  Of course, we know, the calendar doesn’t really matter to a market that trades 24/5.  But I raise the issue as despite the ongoing narrative about the dollar’s still impending collapse, the below chart of both INR and IDR shows that, in fact, these are currencies that are having significant problems and have been selling off steadily despite explicit actions by both nations’ central banks to stop the slide.

Source: tradingeconomics.com

Last night, Bank Indonesia surprised markets and raised rates by 50bps to 5.25% to help mitigate the rupiah’s decline while the RBI entered the market and directly intervened after the rupee fell (dollar rose) below 97.00, a record low.  Both currencies have fallen by about 10% this year vs. the dollar.  Again, the dollar is not going anywhere.

Ok, let’s tour the other markets.  Looking at the dollar more broadly, it is little changed to modestly softer after a solid rally over the past two days on the back of rising yields.  In the G10, most everything is within +/-0.2% or less, hardly worth mentioning and USDJPY is around 159, not quite in the danger zone.  In the EMG bloc, aside from INR (+0.4%) responding to the intervention, ZAR (+0.6%) is getting a reprieve on softer oil prices and then otherwise, things here have also barely moved.

As per the first chart, oil (-2.1%) is slipping again showing no impending fears of disaster.  This, in turn, has helped the metals markets (Au +0.2%, Ag +2.8%, Cu +0.7%) all of which have been under pressure while both oil and yields rose.  For now, I suspect this relationship will remain intact, but as I continue to look for oil to ultimately slide back more substantially, the metals should rebound at that time.

In the bond market, yields are lower across the board this morning, backing off the highs seen yesterday.  I think the below Bloomberg screenshot tells the story well.

It is key to know that neither Brazilian nor Mexican markets are open as I type at 7:30.

Finally, turning to the equity markets, as it appears most people are holding their breath for this afternoon’s Nvidia earnings report, the current situation shows that Asian markets overnight followed the US markets lower with Tokyo (-1.2%), HK (-0.6%), Korea (-0.9%) and Australia (-1.3%) leading the way although other regional exchanges were also generally lower.  Arguably, the one exception of note was India (+0.2%) which seemed to benefit from the FX intervention.

In Europe, though, it’s happy days as you can see below from the Bloomberg screenshot.

Only the UK is not keeping pace and that is despite lower-than-expected inflation readings this morning, which I would have thought would be seen as beneficial.  As to US futures, at this hour they are all higher by about 0.4%, I guess in anticipation of those Nvidia earnings.

On the data front, the only thing today is the EIA oil inventory data where another large draw, about 5 million barrels, is expected.  This is, of course, due to the selling of oil from the SPR and the fact that the US is exporting a record 5 million bpd lately elsewhere in the world of refined products.  As well, the FOMC Minutes are released at 2:00 this afternoon, but given that was Powell’s last meeting and Mr Warsh is due to be sworn in on Friday, and the fact that the market is already aware that the discussion was about potential hikes and what to do about rising inflation, I don’t think they will teach us very much.  This morning there are also two more Fed speakers but right now, they are speaking into a void.

My belief continues to be that the conflict will end sooner rather than later, that oil prices will slide accordingly along with Treasury yields and the dollar, while stocks and precious metals will rally.  I haven’t seen anything to change that view as of now, but I keep on looking.

Good luck

Adf

Still on Hold

Posted on by 
Despite faster growth
The yen continues to sink
Are rate hikes anon?

It’s funny, in Japan, there is a great deal of angst amongst government officials that the economic situation is under significant duress, and they appear uncertain how to act.  Now, in fairness, the ongoing Iran conflict is clearly problematic for a country that imports essentially 100% of its oil, and most of it travels through the Strait of Hormuz.  But if we look at the data, Japan is holding up remarkably well.  For instance, below is a chart of annual GDP which was released last night showing 2.1% annualized growth in Q1.

Source: tradingeconomics.com

Granted, this is not a chart of an extraordinary expansion, but it is also, relative to its European counterparts, a chart to be envied.  For instance, the below chart of German GDP growth (and I use the term growth loosely) shows that after the Covid reopening, things have basically gone into stagnation.

Source: tradingeconomics.com

My point is that things in Japan seem to be moving along relatively well, with solid growth, especially when one considers that the population in Japan is shrinking, so given GDP = # people working x output/person, it is hard to grow the economy with a shrinking population.  Meanwhile, inflation in Japan remains sticky, although because of government subsidies to ameliorate the costs of electricity and fuel in the wake of the Iran conflict, it is below the 2% target for now.  However, apparently it remains a concern amongst the population there.

Source: tradingeconomics.com

Which brings me to the true market related question, what of the yen?  You may recall a few weeks ago when the BOJ intervened because the yen had traded through the 160 level vs. the dollar and then there seemed to be a few mini interventions in the days that followed.  Yet this morning, as you can see in the below chart, the yen is once again marching toward 160, although I have not seen any commentary from the BOJ or MOF on the subject.

Source: tradingeconomics.com

Bringing it all together, the question I would ask is, why is the BOJ even concerned about raising rates at their next meeting in a few weeks?  Ueda-san has been around a long time and understands the only way to address persistent currency weakness is via policy changes.  Especially now that markets have begun to price rate hikes as the next move in the US (I personally don’t believe that will be the case but that is a different story), the yen will continue to slide unless the BOJ moves.  Yet, with GDP growing decently, and underlying price pressures extant, a rate hike should be an easy call.  Currently, the probability appears to be about 75% that they will hike in June, but certainty they will hike by July, at least according to rateprobability.com as per the below table.  I’m not sure why it is even a question.

The war in Iran’s still on hold
As prices for crude stay controlled
But dollars are bid
And equities skid
While nobody wants any gold

As to the Iran situation, President Trump announced he was delaying, for two or three days, any renewed military action at the behest of the UAE and Qatar who claim that substantive negotiations are underway.  Once again, I make no claims of knowledge about what is actually happening there, although that admission is one that most of the punditocracy seems unwilling to make.  

But here’s a thought.  If you were Ahmad Vahidi, the ostensible leader of Iran, and you have spent the last 3 months in spider holes, caves and basements, moving every 8-12 hours lest someone leaks your location to the Israelis or Americans, how comfortable are you in your position?  After all, one of the reasons that people aspire to lead nations is for all the trappings that come with the job. Not only do you get a nice place to live, but you command respect from the people, at least a significant portion of them.  Is it impossible to believe that Vahidi is actually looking for a way out as well, perhaps willing to give up his nuclear ambitions for the removal of the price on his head?  I know that does not fit the narrative for many folks, and is pure speculation on my part, but is it really that far-fetched?

Ok, in the meantime, as we await the next news from Iran, let’s look at market activities.  Starting in the bond market, yields continue to climb higher pretty much all around the world as inflation concerns remain high and there is a growing concern that government bond issuance is going to grow even faster going forward as countries everywhere seek to rearm quickly.  So, Treasury yields (+3bps) are pushing back to the levels seen in January 2025, although remain 15bps below those levels as per the below Bloomberg chart.

And as has been the case for quite a while now, Treasury yields are leading the global yield market with European sovereign’s all higher by about 2bps and JGB yields jumping 6bps last night after the GDP data.  Certainly, JGB traders believe the BOJ is going to hike rates.

In the equity markets, though, risk appetite remains remarkably robust through all the complexities of the war and economic data.  Yesterday’s US session, which started off deeply in the red, rallied back so the DJIA actually closed higher while the other two major indices dramatically reduced their losses.  This morning, futures markets are pointing slightly lower with the NASDAQ (-0.8%) the laggard as questions continue to arise about how long AI will drive the thesis there.  As to the rest of the world, Asia was mixed with the Nikkei (-0.4%) slipping, although every other index in Tokyo rose, China (+0.4%), HK (+0.5%) and Australia (+1.2%) all gaining.  Korea (-3.25%) and Taiwan I-1.75%), though, had rough sessions as those two markets have been driven by semiconductor companies just like the NASDAQ.  The only other noteworthy move was in Indonesia (-3.5%) as investors are concerned about the central bank raising rates after their meeting concludes tonight.

Europe is in fine fettle this morning with gains across the board led by the DAX (+1.4%) and followed by the CAC (+0.8%), FTSE 100 (+0.7%) and Spain’s IBEX (+0.4%).  I keep reading that there is optimism that an agreement will be reached as the rationale for these moves, but I guess that is the way things go.  Never forget this perfect illustration of how market information is passed.

Turning to oil markets, this morning has seen that war ending optimism here as well with WTI (-0.4%) and Brent (-0.9%) both slipping a bit.  Interestingly, metals markets are not behaving as they have recently as they, too are lower; gold (-0.65%), silver (-2.1%), copper (-1.1%).  In the end, like every market, movement here is entirely dependent on the Iran situation, at least in the short run.

Finally, the dollar is flexing this morning rising against virtually all its major counterparts.  In the G10, AUD (-0.7%) is the laggard, but the euro (-0.3%) and pound (-0.2%) are both under continued pressure with both trading near recent lows as per the tradingeconomics.com chart below.

The rest of the block has not fallen as much but is uniformly lower.  In the EMG bloc, KRW (-1.3%) suffered after the sharp decline in the equity markets there and ZAR (-0.5%) continues to suffer on the back of weaker gold prices.  The one outlier is BRL (+0.3%) which is benefitting despite a weaker economic outlook after some soft data yesterday continues to encourage the potential for further rate cuts there.

And that’s really it for today.  There is no data today although there are 3 Fed speakers, including Governor Waller who many have come to believe is a critical voice for the FOMC.  Broader movement continues to be all about Iran and how things evolve there.  With renewed military engagement on hold, I suspect that the speculators are going to buy stocks again in hopes of a positive outcome.

Good luck

Adf

Hot, Hot, Hot

Posted on by 
So, prices were all Hot, Hot, Hot
Resulting from Trump’s Iran shot
But do not forget
The government’s debt
And spending, with what that has wrought

Meanwhile, Trump, to Beijing, has flown
As both sides seek a temperate zone
Where it is agreed
To what both sides need
And neither, the outcome, bemoan

For a change, Iran is not the lead story today in markets.  Instead, there is much angst over yesterday’s CPI reading, which was hotter than forecast, and much pontificating as to what will come from the summit between Presidents Trump and Xi that starts tonight in Beijing.  Let’s take inflation first.

The results showed the month-on-month readings for headline (0.6%) and core (0.4%) which translated into annual readings of 3.8% and 2.8% respectively.  I always turn to The Inflation Guy™, Mike Ashton, when trying to understand CPI readings and have linked here his description of the report and things driving it, which you should all read.  However, I will offer his conclusion here:

“Wrapping this up, the read is actually pretty easy. Inflation is not just in energy, but right now is fairly wide as the diffusion index shows. Some of that is related to energy…the price of diesel fuel affects trucking costs, which affects other goods prices…and some of it is related to the fact that wage growth is no longer slowing. Any way you look at it, as I said the read is pretty easy: the Fed obviously isn’t going to be tightening into an oil shock. But there is nothing here that gives them cover to ease into an oil shock either. Warsh inherits a pickle.”

I know the Fed targets Core PCE, not Core CPI, but I include the below chart of the latter to remind us all of just how far from their target the Fed has been for the past 5+ years.  Powell may have bitched about political pressure, but he received none during the Biden administration and he failed dismally then too.  Just sayin’.

Source: tradingeconomics.com

(One last thing I will note is that USDi, which I mentioned yesterday, will return 10.2% annualized during the month of June, on top of this month’s 12.6% return.  Folks, you really should own some.  You can mint it at www.usdicoin.com ).

We cannot be surprised that yields rose yesterday on the back of the CPI result with the 10-year rising a further 3bps right after the number and 4bps on the day.  This takes us to a 10bp rise in the past three sessions including this morning as per the below.

Source: tradingeconomics.com

It also is the highest yield since last summer and clearly is not moving in the direction the administration would like to see.  The thing is, now that we are several months into the Iran war and oil prices have been elevated since the beginning of March, we are going to see more pass through of price increases due to energy costs, at least until demand starts being destroyed.  That is always the market tension, rising prices force behavioral adjustment unless the central bank accommodates those prices by increasing money supply.  It is, of course, that action which helps drive generalized inflation as opposed to specific price increases.  Mr Warsh, who was confirmed as a Fed governor by the Senate yesterday and faces another vote today to become Fed Chair, although I expect that will be without fireworks either, will have has work cut out for him.

Moving on to the Beijing summit, the key to remember is that summits are where things are signed amid a ceremony, they are not events to negotiate details.  Secretary Bessent has been in Asia all week and he has met with Chinese Premier Le Hifeng, clearly discussing terms of what can be agreed.  One would expect that the focus will be on Iran and having China press Iran to come to an agreement, trade between the nations, especially in AI related technology and rare earth elements, and Taiwan.  I have no way of knowing what will be announced, but I’m confident Mr Trump wouldn’t be going if there wasn’t a deal of some sort already agreed.

So, let’s see how markets have behaved overnight.  Yesterday’s US session, which started out looking pretty awful, moderated throughout the day to wind up with fairly benign outcomes.  Weirdly, this led to some dramatic differences in Asia with some strong gainers (Korea +2.6%, Japan +0.85%, China +1.0%, Singapore +1.2%) and some serious laggards (Indonesia -2.0%, Taiwan -1.25%) with some lesser weakness (Australia, New Zealand, Malaysia and HK).  I might argue that most investors were excited about the potential results of the summit, but if so, perhaps it implies a change in the US position regarding Taiwan, and that could well be a negative there.

In Europe, the picture is also mixed as Germany (+0.7%) is having a solid session on some solid earnings reports from the pharma sector, although France (-0.4%) is under pressure after the Unemployment Rate there jumped to 8.1%, its highest print in five years.

Source: tradingeconomics.com

Otherwise, the rest of Europe is mixed with little of note.  US futures at this hour (7:30) are also mixed with DJIA (-0.25%) lagging but the other two major indices showing gains of 0.25%.

While we discussed Treasuries above, looking elsewhere around the world, yields this morning in Europe are essentially unchanged, having risen on the back of the US CPI report yesterday.  However, overnight, JGBs saw yields rise 4bps on that inflation fear, and they have made yet another new 19-year high as per the below chart (dates are in European terms).

In the commodity markets this morning, oil is essentially unchanged as it is clear nobody knows how things will play out in Iran.  There have been numerous commentators competing to describe just how much oil has been missing from the market and how soon (June? July? September?) the infrastructure will crash and it will be a global depression.  But they keep having to push their timeline further out as the combination of more production outside the gulf plus the ingenuity of getting production there to other markets via trucks and trains, has mitigated the overall price risk.  Again, here in the US, there is no risk of a shortage of any type as we continue to export our net surplus of products.  I have not read about the blockade lately, but I think that speaks to the fact it must be effective because most articles wanted to describe it as a failure and not doing its job.  If Iranian oil is not getting to market, their financial troubles are growing apace which is the key pressure point.

As to the metals markets, given the lack of movement in oil, it should be no surprise that gold (-0.25%) is little changed as well.  However, something is changing here and that is silver (+1.0%) and copper (+2.0%) are both starting to distance themselves from the gold trade as both remain critical inputs into the electrification story.  A quick look at the chart below of the two elements shows how just in the past two days, silver has broken away from gold.

Source: tradingeconomics.com

Finally, the dollar is firmer again today, continuing to ignore the many calls for its demise.  But as we have seen in most other markets today, the magnitude of the movement is unimpressive.  So, DXY (+0.2%) is an excellent proxy for virtually the entire FX market this morning.

On the data front, today brings PPI (exp 0.5% M/M, 4.9% Y/Y) and core (0.3% M/m, 4.3% Y/Y) although with CPI already released, I doubt it will get much interest.  We also get the EIA oil inventory data which is looking for continued draws of roughly 6 million barrels across crude and products.  there are Fed speakers too, but when was the last time anyone listened to anything they had to say with interest?  Exactly.

It is shaping up to be a quiet session (famous last words) and I suspect all the news of note will come from Beijing tonight.

Good luck

adf

Quite Sublime

Posted on by 
Though skeptics do not yet believe
That Trump, a peace deal, will achieve
The markets are saying
This sunshine they’re haying
And fading this move is naïve

So, oil continues to fall
And stocks are just having a ball
It’s peace in our time
And all quite sublime
To many, though, this tale is tall

It is not clear what else to say about the current situation other than the markets are starting to believe that the Iran conflict is coming to a close.  The headlines from the administration and news from Pakistan seem to indicate a deal is near, something we all should welcome.  Certainly, the market is ready to accept this as gospel, at least based on the current risk appetite being demonstrated across all markets.  So, this morning, oil (-2.8%) continues its rapid decline, down more than $18/bbl from its highs just one week ago.

Source: tradingeconomics.com

The commentariat refuses to accept that the conflict is ending and I cannot tell if that is because they hate President Trump so much, they cannot stand the idea of him concluding things having achieved objectives, or because if the conflict is over, they will need to find the next thing to prove their ‘expertise’ and they don’t know what that is yet (hantavirus anyone?)  Regardless, markets are on board with this narrative as the moves we saw yesterday are simply extending this morning.  

Meanwhile, the data from yesterday showing that ADP Employment was a stronger than expected 109K and the JOLTs quit numbers rose, meaning more people are willing to quit their jobs for a new one, indicating a growing confidence in the labor market, point to a continuation of the US equity rally, and by extension, the global rally.  (As an aside, I chuckled at the article in the WSJ this morning about how the next target of taxes should be ‘compute’ since AI is going to replace human workers.  My comment here, which has been confirmed by my time this week at the Consensus 2026 cryptocurrency conference, is that machines are great, but people still want to deal with people they can trust!)

Anyway, with the conflict ostensibly coming to a close, there is not much else to discuss outside actual market activity, so let’s see how things responded to this news.

By this time, you have all checked your PA’s and saw the green from yesterday there.  Overnight, Asian markets were also quite positive with Japan (+5.6%) exploding higher after their Golden Week holidays ended.  Excitement on tech as well as a market that is looking forward to Treasury Secretary Bessent’s visit were the drivers.  But we also saw strength in China (+0.5%), HK (+1.6%), Korea (+1.4%) and Taiwan (+1.9%).  In fact, looking across the region, you are hard pressed to find a true laggard, as India (0.0%) was the worst performer of note.  European markets, though, are not quite in as fine a fettle with most of them essentially unchanged this morning although the UK (-0.7%) is lagging after some underwhelming earnings reports as it appears profit taking is today’s motive.  As to US futures, at this hour (6:45), they too, like Europe, are essentially unchanged

In the bond markets, yields continue to slide with Treasury yields lower by -2bps and virtually all European sovereign yields slipping -1bp.  Overnight, JGB yields fell -3bps as markets there reopened and essentially all Asian government bonds saw yields decline as well.  Apparently, fears over rampant inflation are ebbing.  You may recall on Tuesday I discussed the 30-year Treasury as it traded above 5.0% on Monday and stayed there for about a minute.  That had engendered a great deal of apocalyptic discussion.  However, here we are this morning with 30-year yields slipping another -2bps, and now 10 bps below that little spike, and back below 5.0%.  But I think it is worthwhile to offer a little perspective on the 30-year bond and the idea that 5.0% is deadly.  Here is the chart of 30-year Treasury yields since 1985.  Perhaps the anomaly was much lower yields, not 5.0%!

Source: finance.yahoo.com

Precious metals are continuing to benefit from the peace initiative and oil’s delice with gold (+1.0%) and silver (+4.0%) both stronger again after big gains yesterday.  In fact, I am starting to read more about why silver is set to make massive gains because of shortages, a narrative that was set aside for the past two months but seems to be reawakening.  Now, I am no technician, but I am given to understand that if you look at this trend line in silver from its January peak, we have broken above the line and that portends a massive move higher.  (full disclosure, I am long silver so would be happy to see that but have not spent the extra money yet!)

Source: tradingeconomics.com

Finally, the dollar is softer again this morning, which should be no surprise based on the overall market zeitgeist this morning.  So, the DXY (-0.15%) is a pretty good approximation of what is happening, although we have seen some larger moves, notably NOK (+0.8%) which seems to be responding to the fact that the country is going to reopen some shuttered oil and gas drilling sites in the North Sea as Europe tries to figure out where to get energy from.  As to the yen (0.0%) after a series of what appeared to be modest interventions by the BOJ during Golden Week, it appears the market may be explaining that the fundamentals are still pointing to yen weakness and while the BOJ may be able to cap the dollar for a short time, establishing real JPY strength will take a lot more effort, and real policy changes (i.e. much higher interest rates).

Source: tradingeconomics.com

Turning to the data this morning, we get the weekly Initial (exp 205K) and Continuing (1800K) Claims data, which continues to hover near historic lows despite the angst over the labor market.  We also see Nonfarm Productivity (1.4%) and Unit Labor Costs (2.6%) and hear from several more Fed speakers, although most of their comments are back page news.  Of course, tomorrow we will see the NFP report, and that will certainly garner all the attention.  Personally, I will be focused on the Manufacturing Payrolls outcome as a proxy for the reshoring initiative and the potential for continued strong economic activity going forward.

And that’s really it.  Despite the ongoing narrative of the dollar’s demise, it remains well within its recent trading range, and I keep reading about other nations issuing dollar debt as that is the market with the most liquidity.  Over time, I continue to see the dollar as the best fiat around, although I still like stuff more than paper.

Good luck

Adf

That’s Nuts

Posted on by 
Seems Jay is a narcissist too
Refusing to leave when he’s through
He claims he won’t try
To stop the new guy
But sticking around is the clue

Meanwhile, in his last vote as Chair
The poll, for his views, didn’t care
As one wanted cuts
And three said that’s nuts
Seems politics is in the air

Starting with the FOMC meeting, as universally expected, they left policy on hold with the Fed funds rate target 3.50% to 3.75%.  However, in an extension of the last meeting’s three dissents, this time there were four, so the vote was 8-4 to leave rates on hold.  However, that seems a bit disingenuous to my eyes, as while Governor Miran wants a 25bp rate cut, as he has said all along, the other three ‘dissents’, regional presidents Hammack, Kashkari and Logan, “did not support inclusion of an easing bias in the statement at this time.”

However, after having read the statement numerous times, I challenge anyone to highlight where they expressed an easing bias.  Here is the exact wording:

Recent indicators suggest that economic activity has been expanding at a solid pace. Job gains have remained low, on average, and the unemployment rate has been little changed in recent months. Inflation is elevated, in part reflecting the recent increase in global energy prices.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. Developments in the Middle East are contributing to a high level of uncertainty about the economic outlook. The Committee is attentive to the risks to both sides of its dual mandate.

In support of its goals, the Committee decided to maintain the target range for the federal funds rate at 3‑1/2 to 3‑3/4 percent. In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee is strongly committed to supporting maximum employment and returning inflation to its 2 percent objective.

In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.

But that is the narrative.  Of course, the fact that there were four dissents led to much tongue wagging by the narrative set with some claiming that Powell had lost the room, while others claimed that this is a warning to Warsh that he will not be able to get his way.  

During Warsh’s nomination hearing, one of the things he discussed in terms of the institutional changes necessary, was that there needed to be less communication by FOMC members as it didn’t do anything to help the process.  I heartily agree with this approach, and perhaps this was all the regional presidents, who are looking ahead and seeing that they will not be able to move markets anymore, certainly a heady feeling I’m sure, trying to stake their turf.

Meanwhile, Chair Powell, the arch traditionalist as we have been told, will be breaking with tradition and remaining on the board in his governor’s role after his chairmanship has ended, although he claims this is to ensure the institution remains protected from politics. (🤣🤣🤣🤣🤣🤣🤣🤣🤣). Whatever.  I am willing to wager that Mr Powell is a consistent dissent as long as he is on the board.

In the end, no policy changes were expected nor forthcoming.  As of the close of yesterday’s session, the Fed funds futures market looks like this:

Source: cmegroup.com

Basically, market participants do not believe the Fed is going to do anything for nearly the next two years.  I hope they are right!

Remember Monday?
Ueda explained…nothing
That’s what the yen heard

Early this morning
Katayama, with a smile,
Hinted at bold action

Monday’s BOJ meeting resulted in no policy changes, as was widely expected, but Ueda-san perfectly illustrated the futility of central bank chiefs trying to guide markets with their words instead of deeds.  Basically, he fumbled around exhibiting no commitment to anything.  And, one look at the chart below shows that traders continued to sell the yen in the wake of the BOJ meeting on the 28th.  However, traders are nothing if not attentive to signals and while it took her a little while, Japanese FinMin Katayama livened things up a bit after Tokyo markets closed as follows [emphasis added]:“We are nearing the point where bold action on exchange rates will be necessary,” and more entertainingly, “I just want to remind everyone: whether you’re traveling or taking a break, don’t put down your smartphone.”

Source: tradingeconomics.com

One of the problems for them is that we are coming to Golden Week, with the first of the holidays already past yesterday.  But Friday through next Wednesday are all Japanese holidays with no markets open.  On the one hand, lack of liquidity can suit the BOJ as any intervention may have a much larger than normal impact.  On the other, holiday activity is very rare.  The term ‘bold action’ is, I believe, step 6 in the 7 steps to intervention and as you can see from the above chart, traders are listening.  The problem Katayama and Ueda have is that the fundamentals remain negative for the yen.  Is it really speculative to respond to weakening Japanese economic data that is worsened by the current energy situation vs. surprisingly strong US economic data where the energy situation is a benefit for the US?

If history is any guide, the dollar is likely to trade below that 160 level for a little while as traders may not want to test things during the Golden Week lack of liquidity, but ultimately, I suspect that dollar can push higher and the BOJ will be in.  Their problem, though, is fundamental, and until the fundamentals change, the yen will be under pressure.

Speaking of fundamentals, let’s take a quick look at GDP figures and ask ourselves about the prospects for currencies in the future.  The below chart from tradingeconomics.com shows annual GDP for the US (grey bars), Germany (blue bars), France (red bars) and Italy (black bars).  See if you can tell the difference!  The US number for Q1 is to be released this morning and expected at 2.3%.

Yesterday’s US data surprised on the high side with strong Durable Goods and Housing data.  This follows stronger than expected Retail Sales data as well, which is the opposite of the situation in Europe.  In fact, a look at the Citi Surprise Index below shows just how surprisingly bad things are in Europe relative to the US.

Again, please explain to me the case for the euro’s strength.

Ok, on to markets.  Bonds were the big tell yesterday as yields in the US rose sharply, up 8bps at their peak, although have since retraced -3bps to 4.40%.

Source: tradgineconomics.com

While that is not the highest yield we have seen since the war began, it is near the upper bound, but I suspect that has more to do with the fact that the US economy, as demonstrated above, is anything but weak right now.  Maybe the dollar should be considered a petrocurrency going forward!  European sovereign yields tracked Treasury yields and this morning, they too are lower by between -2bps and -4bps.  One noteworthy aspect is that ahead of the BOE meeting this morning, 10-year Gilt yields are above 5.0% for the first time since 2008, higher even than during the Liz Truss inspired liability management crisis.

Of course, the other thing weighing on bonds is the oil price (+0.1%) which while it is little changed this morning has climbed steadily and is higher by nearly 12% in the past week.  The entire discussion here is about the naval blockade and whether it will be able to force Iran to capitulate soon.  Certainly, President Trump is doing all he can to apply increased pressure on the Iranians with more secondary sanctions on all the banks that have surreptitiously handled Iranian money in the past.  WTI remains below the spike highs from the first night of the war, but it has been climbing steadily of late.  There is no doubt that there has been material damage done to the oil infrastructure in the Middle East and it will take time to repair once the fighting is done.  As the blockade continues, it appears some of that destruction is being priced in.  However, with the UAE out of OPEC and Venezuela likely to leave as well, there will be a race to see who can pump oil fastest.  I remain convinced that there is a firmer cap than floor over time.

Perhaps the biggest surprise today is that gold (+2.0%) and silver (+3.2%) have rebounded sharply despite oil’s continued rally.  That inverse correlation had been quite strong, although I continue to have a difficult time understanding its underlying cause.  Nonetheless, commodities across the board are in demand today.

In the equity markets, yesterday’s US performance was lackluster ahead of the big earnings releases, two of which were quite strong (GOOG and AMZN) while two were less optimistic (MSFT and META).  Asian markets were broadly negative as rising oil prices continue to weigh on the region with the Nikkei (-1.1%) and Hang Seng (-1.1%) leading the way lower amid mostly poor outcomes throughout the region.  Only Singapore (+1.1%) and New Zealand (+1.0%) managed to buck the trend, after better-than-expected PMI data.   Meanwhile, in Europe the picture is mixed with France (-0.5%) and Spain (-0.3%) softer while Germany (+0.3%) and the UK (+1.0%) are in better shape.  The BOE just announced no policy change but seemed to sound more hawkish as they are going to try to use monetary policy to prevent higher oil prices.  Historically, that has been a catastrophic central bank error, but I will not be surprised if they go down that road.  As to US futures, at this hour (7:15), they are pointing higher across the board by between 0.3% and 0.6%.

Finally, the dollar is softer this morning, with the yen (now +2.0%) leading the way, although that is hardly a dollar story and decidedly limited to the yen.  But, vs. the G10, the greenback is universally softer (EUR +0.3%, GBP +0.35%, AUD +0.6%, CHF +0.7%).  Frankly, this doesn’t make sense to me, but markets will do that to you.  Versus the EMG bloc, the dollar is also softer across the board with KRW (+1.0%) the leader as it follows the yen higher, and the rest of the block showing gains of between 0.25% and 0.5%.  I still stand by my view that the dollar benefits over time, but apparently not today.

And while I fear I have gone on too long already today, there is a lot of data coming out as follows: Personal Income (exp 0.3%), Personal Spending (0.9%), Q1 GDP (2.3%), PCE (0.7%, 3.5% Y/Y) and Core PCE (0.3%, 3.2% Y/Y), Initial Claims (215K), Continuing Claims (1820K) and then later this morning, Chicago PMI (53.0) and Leading Indicators (-0.1%).  With the Fed ostensibly showing a hawkish bias, all eyes will be on the Core PCE data.  But really, my take is the combination of position liquidation in the yen and the twists and turns in the war are going to be today’s drivers.  While you cannot catch a falling knife, I do see this dollar downtick as quite temporary.

Good luck

Adf

Not Right

Posted on by 
This Friday is labeled as Good
And markets worldwide understood
That trading’s not right
So closed with no fight
If only the government could!

Instead, they’ll release NFP
Though traders won’t be there to see
And Monday, as well
There will be no bell
Let’s hope war’s not raised a degree

Philosophers ask, if a tree falls in the forest and nobody is there, does it make a sound?  Today, investors will ask, if the NFP report is released and there are no markets to respond, does the data matter?

In a highly unusual circumstance, this morning’s NFP report is going to be released on Good Friday, the one day of the year when equity markets are closed but banks are open, as is the US government.  As well, given the holiday, many international markets were closed overnight and essentially all of Europe is closed right now.  Too, Monday is a holiday in many nations around the world, Easter Monday, so equity markets throughout Europe and all old Commonwealth nations will be closed for a very long weekend.

Which begs the question, does today’s data really matter?  After all, we have a long weekend ahead of us and the possibility of an escalation of fighting in Iran, which if that occurs will make any data today moot.  FWIW, here are the expectations for this morning:

Nonfarm Payrolls60K
Private Payrolls70K
Manufacturing Payrolls-5K
Unemployment Rate4.4%
Average Hourly Earnings 0.3% (3.7% Y/Y)
Average Weekly Hours34.3
Participation Rate62.3%

Source: tradingeconomics.com

Remember, too, ADP Employment was a touch better than expected.  As well, there is increasing evidence that the data with which we had become familiar regarding the number of new jobs necessary to maintain a stable employment market has fallen sharply.  For the longest time, econometric estimates were that somewhere between 150K and 200K new jobs were needed each month to prevent the Unemployment Rate from rising.  But the Dallas Fed just released a research report suggesting that is no longer the case.  In fact, they estimate the number is basically zero.

Obviously, the big changes have come from immigration policy in the US, with the closing of the border, the deportation of between 350K and 650K (depending on your source) of illegal immigrants by the government as well as the self-deportation of somewhere on the order of 2 million more people.  These actions have dramatically reduced the available work force and with that, the number of new jobs required to reach an employment equilibrium.

Despite these changes, arguably the data ought still to matter as it represents a key part of the FOMC mandate.  But given the war has drowned out basically all economic data, it is not clear these numbers are going to be meaningful for a while yet.  All those who trade via algorithm are the ones who are most impacted as payroll day was always a huge winner for them.  And while US futures markets are open (currently -0.2% across the board at 7:25), there will be no arbitrage opportunities as the underlying markets won’t open until Monday in the US and Tuesday in Europe.

Which takes us to the other story, will there be an escalation of fighting in Iran over the long weekend?  Every story I have read in the MSM has written, almost glowingly, about how the Iranians are completely prepared for any US invasion and will inflict serious damage and casualties on the Americans if one comes.  Again, I am not a defense analyst, but to my understanding, the US does not yet have all its assets in theater which will preclude any opening salvos.  The other thing I would say is historically, I wouldn’t bet against the USMC achieving their objective.  

And that’s where we stand this morning, awaiting data to be released into a void with no opportunity to respond, really, until Monday, at least in the equity markets.

In fact, other than cryptocurrencies, which are always open, the only market of note that is open today is the FX market, and that is suffering from diminished liquidity because European centers are closed for the holiday, although US banks will be active.  Or perhaps active is the wrong term, they will be open.  With that in mind, it should not be surprising that the dollar is, overall, little changed from yesterday’s closing levels.  In fact, every G10 currency is within 0.1% of yesterday’s close although we have seen a touch of weakness in ZAR (-0.6%) which is still suffering from gold’s -2.25% performance yesterday.  

The only other currency that moved more than 10 basis points was INR (+0.3%) which continues to benefit from RBI efforts to prevent its complete collapse.  You can see the performance of the rupee over the past five years and that spike near 100 was seen as a near-death experience by the RBI and drove them to respond.  Alas, the war is not helping their cause at all and there are scant few reasons to buy the rupee for most traders these days.  

Source: tradingeconomics.com

Otherwise, all I can offer is for you all to have a wonderful Easter/Passover weekend and we will pick up again Monday, but really it will take until Tuesday before we get a better sense of how the news will be absorbed, whatever it may be.

Good luck and good weekend

Adf

All Will Reject

Posted on by 
Down Under the latest decision
To raise rates was made midst division
Inflation there’s rising
So, it’s not surprising
The two sides have had a collision

But elsewhere this week I’d expect
That central banks all will reject
A hike in their rate
As long as the Strait
Stays closed, though inflation’s unchecked

For a while now, I have been making the case that central bank activities, at least in the West, had a diminishing impact on market behavior, and that was before the war in Iran began.  My thesis had been based on the idea that fiscal policies had become so overwhelming that market participants realized that the odd 25 basis point rate move was not going to move the needle, at least not on a short-term horizon.  

Then, of course, at the beginning of the month, the Iran conflict began which garnered all the market’s attention, rightfully so.  But here we are, 17 days into the conflict and suddenly, investors seem far less concerned with the situation.  Naturally, the halting of ~20% of daily oil flows through the Strait remains a critical issue, but arguably, until something there changes, the market seems to have absorbed that in its price.  Consider the following screen shot of equity markets from 6:30 this morning.  it is very difficult to look at this and conclude there is any sense of panic.

Source: tradingeconomics.com

Sure, equity markets have slipped over the past month, but the magnitude of that decline has been pretty modest considering oil prices have jumped 50% during that period.   The lesson I take from this is that speculative positioning has been substantially reduced because, frankly, we have not seen nearly as much fear response as I would have anticipated heading into this situation.  If we look at the CNN Fear & Greed Index below, sure it says we are in extreme fear (below 25 on the chart), although this is nowhere near the lows seen during the past year as per the below chart from cnn.com

But if you go to the link above, it shows a series of charts covering different facets of the stock market, and frankly, none of them demonstrate to me that fear is that rampant, despite their labels.  After all, most of the charts show the current readings right in the middle of the range over the past year.

Which takes us back to, what is driving markets these days?  Two and a half weeks into the war, I presume that margin calls have been settled and those positions adjusted or reduced accordingly.  After all, margin clerks demand settlement immediately, not in two weeks’ time, so they are done.  Economic data has been underwhelming, although we are beginning to see the first inklings of war-related weakness with yesterday’s Empire State Manufacturing disappointment (-0.2 vs 7.1 last month and 3.2 expected), but even more so with this morning’s German and European ZEW Economic Sentiment Indices.

                                                                                                                Actual           Previous          Forecast

Source: tradingeconomics.com

This is the first March data we are seeing, and I suspect all of it is going to be lousy.  But again, that is already priced in, I believe, hence the relative lack of movement.

And so, I turn to the central bank community, with virtually the entire G7 having meetings this week.  While I don’t anticipate any rate movement other than last night’s RBA hike of 25bps, which was priced in before the conflict began, I expect that we are going to need to listen to what they all say as our best indication of current expectations of future behavior, and whether they will react to the oil price rise, or recognize higher rates will not open the Hormuz Strait.  At this point, especially since there has been insufficient inflation data to alter decisions, I expect a lot of talk about carefully monitoring the situation, but no promises to do anything.  And remember, knock-on effects of higher oil prices into other things take time to be felt, so given the completely reactive nature of all central banks, that is not going to be a reason to raise rates.  Ironically, central banks are back in the market discussion despite themselves!

Ok, let’s tour the markets and see how things have behaved overnight.  Yesterday saw a very solid US session, although as in the table above, this morning futures are very modestly lower.  In Asia, Tokyo (-0.1%) slipped a bit after Katayama-san, the FinMin, explained she was watching the yen closely and would consider “bold moves” (a euphemism for intervention) if deemed necessary.  Elsewhere in the region, though, only China (-0.7%) failed to follow the US with Korea (+1.6%), India (+0.75%), Taiwan (+1.5%) and Singapore (+1.2%) representative of the price action.  Other markets had lesser gains, but gains they were.

Meanwhile, European bourses are all in the green as well, albeit not as robustly as Asian exchanges showed.  Spain (+0.8%) is the leader, but 0.5% gains in France and the UK are also extant while Germany (+0.1%) is still trying to shake off that horrible ZEW number.

In the bond market, Treasury yields slipped again yesterday, down -3bps, and this morning, European sovereigns are showing similar activity, with yields sliding between -3bps and -5bps across the entire continent and the UK.  This is certainly odd behavior if the market believes that oil prices are going to remain higher for longer.  If I look at the combination of the early March data weakness and the fact that bond investors are not panicking in any sense, there is no indication that central banks are going to do anything for now, but I suspect that economic weakness will be the issue that arises going forward.  After all, inflation has not seemed to be their driver for a while now.

In the commodity space, yesterday saw oil prices slide about 4%, while this morning they are higher by 3.0%.  but a look at the chart tells me that for now, they have found a new equilibrium just below $100/bbl +/- a bit. 

Source: tradingeconomics.com

It is important to remember that despite the large jump in prices recently, on an inflation adjusted basis, the current level is still only half as high as the 2008 spike to $145/bbl.  In other words, I might contend that it is not the price of oil, so much, right now, but rather its availability that is going to be the key issue going forward.  Naturally, Europe has jumped in to explain that they believe high oil prices help them denounce the US removal of sanctions on Russian oil as they will not countenance such things despite the loss of their key suppliers.  I’m glad I don’t live in Europe.

As to the metals markets, Zzzzzzz is the only way to describe them.  While copper (-1.2%) has slipped, neither gold nor silver has moved overnight, and both remain essentially at their new homes of $5000/oz and $80/oz.

Finally, the dollar is also doing little this morning, essentially unchanged vs. most its major counterparts.  NOK (+0.6%) is enjoying oil’s rally while ZAR (-0.5%) is suffering from the lack of gold movement.  And otherwise, it is hard to get excited about anything with movement +/- 0.2% or less across both G10 and EMG currency blocs.

There is no primary data released this morning in the US.  The FOMC begins its two-day meeting and tomorrow at 2:00 we will learn that policy is unchanged, but all eyes will be on the dot plot and the SEP report to try to better understand the potential future path.  But for today, absent a major change in the Iran situation, I don’t imagine it is going to be very exciting anywhere.

Good luck

Adf

Designed to Ease Nerves

Posted on by 
The IEA, last night, proposed
That since, Hormuz Strait, has been closed
Strategic reserves
Designed to ease nerves
Ought be released and not opposed

But so far, it’s not been approved
Despite the fact it is behooved
So, oil is higher
As every supplier
Embraces their, margins, improved

It is somewhat ironic that the biggest story of the evening, the IEA’s recommendation that nations around the world release between 300 million and 400 million barrels of strategic petroleum reserves has not helped mitigate the rise in oil prices.  After falling sharply yesterday, this morning, WTI (+4.5%) is rebounding sharply again.  A look at the chart below reminds me of silver from late January, and certainly, as the following chart demonstrates, daily volatility in that market has made a significant step higher from its pre runup levels.

Source: tradingeconomics.com

One need only look at the size of the daily candles to understand that movement each day has increased substantially since then.

Source: tradingeconomics.com

Of course, the countervailing news that is driving oil higher is that Iran has begun to mine the Strait of Hormuz, which will make resuming transit more difficult when hostilities cease.  In fact, that appears to be the newest front in the war, with the US attacking the small boats Iran is using to try to lay mines.  It seems this is similar to the drug boat attacks the US carried out in the Caribbean late last year prior to the exfiltration of Venezuelan President Maduro.

Again, the interesting thing to me about Iran’s actions is that by closing the Strait, they cut off 90% of their own revenue, and as they are actively fighting a war, that seems a major hindrance.  After all, Iran is nowhere near self-sufficient in anything a nation needs to continue its existence.

But the fog of war is just that, a situation that prevents clear understanding of all that is ongoing in the area.  As we sit, fortunately, thousands of miles away from the action, and everything we read is spun by whoever is writing it, it remains extremely difficult to get a good understanding of the situation in Iran, either tactically or strategically.  All we have is the market price action as an indicator.  

But before we look at markets, it is worth mentioning that CPI is released this morning with the following expectations: Headline (0.3% M/M, 2.4% Y/Y) and Core (0.2% M/M, 2.5% Y/Y).  The problem with this data is twofold.  First, it continues to be polluted by the impact of the government shutdown last autumn, but more importantly, it is for February, and the Iranian action has been entirely in March, so there will be no impact from the dramatic rise in oil prices in the data.  Ultimately, in this case, the data is almost certainly going to be ignored by the Fed, to the extent they even look at CPI rather than PCE.  Of course, the PCE data will have the same problems.

So, let’s turn to markets now.  Yesterday’s nondescript price action in the US was followed by a more positive tone in Asia, arguably on the IEA news.  While there were some laggards (India -1.7%, Indonesia -0.7%, HK -0.25%), the bulk of the region did just fine with Tokyo (+1.4%) and China (+0.6%) both nicely in positive territory, although that was nothing compared to Taiwan (+4.1%).  Otherwise, the rest of the region was positive somewhere between +0.5% and 1.0%.  Europe, however, is having a less positive morning with most major bourses lower on the day (Germany -0.7%, France -0.3%, UK -0.6%, Italy -0.3%) with only Spain (+0.3%) managing a gain in the session.  Energy continues to be the biggest concern here although as I type at 7:25 this morning, we are getting the first word of SPR releases from several nations including Germany and Japan.  Perhaps there won’t be a coordinated release after all.  Meanwhile, US futures at this hour are basically unchanged.

In the bond market, yields rose yesterday afternoon in the US and have edged another 1bp higher this morning while European sovereign yields all catch up to yesterday’s US move with gains of between 5bps and 8bps on the continent.  It is important to remember that there is a strong correlation between oil prices and 10-year yields, as would be expected based on the direct connection between oil prices and inflation.  The chart below shows the past week’s movement in the two markets.  The long-term correlation averages +0.61% with a range of +0.5% to +0.7% according to Grok.

Source: tradingeconomics.com

Again, referring back to today’s CPI, we can expect that CPI next month is going to be higher than this month, even if the war ends today.

In the metals markets, weakness is the order of the day although gold (-0.1%) is just barely so.  However, those metals with industrial uses are faring worse this morning led by platinum (-2.4%) but both silver (-1.75%) and copper (-1.7%) are under pressure.  A potential explanation here is that continued high oil prices will weaken economic activity and therefore demand for these metals.  The counter argument is that war is inflationary at all times, and metals tend to do well in those periods.

Finally, the dollar is slightly firmer across the board, but movement has been de minimis overall.  The noteworthy exception is AUD (+0.6%) which has been rallying recently on concerns (hopes?) that the RBA is getting set to raise rates at their meeting on Monday (Sunday night here).  In fact, the Aussie has traded to its highest level in almost four years, although I have a hard time understanding the attraction given the softened state of economic activity there (recent GDP reading of 0.8% Y/Y) and an energy policy only the Europeans could love as they continue to prohibit nuclear power and shut down coal despite having abundant resources in both.  But, in the FX world, relative interest rates mean a lot, and the perception of a hawkish central bank is apparently enough to overcome bad fiscal and energy policy.

And that’s really all for today.  We do see the EIA oil inventory data, with a small net draw expected and Fed Governor Bowman speaks, although it is at the ABA’s Summit on Regulation, so there will likely be no monetary policy discussion as this is the quiet period.

Where do we go from here?  Your guess is as good as mine.  We are already seeing oil prices slip a bit with the announcement of the SPR releases, although they remain higher on the day.  The war continues to drive all the narratives so if you are trading, keep abreast of that news.  If you are not trading, though, avoid it at all costs, it will make for much happier days!

Good luck

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