Tag Archives: stock-market

Dust in the Wind

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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

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The Die Isn’t Cast

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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 by 
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:

  1. Recent data releases point to cooling inflation offering a respite on concerns of runaway prices
  2. Delaying any action until the task forces complete their work and help reset the way the Fed approaches things feels like the goal
  3. 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.

TodayGoods Trade Balance-$100.0B
 Case-Shiller Home Prices1.3%
 Consumer Confidence92.3
WednesdayFOMC Decision3.75% (unchanged)
ThursdayBOE Rate Decision3.75% (unchanged)
 Initial Claims200K
 Continuing Claims1800K
 Q2 GDP2.1%
 Personal Income0.3%
 Personal Spending0.3%
 PCE-0.1% (3.7% Y/Y)
 Core PCE0.2% (3.3% Y/Y)
FridayBOJ Rate Decision1.0% (unchanged)
 Employment Cost Index0.8%
 Chicago PMI56.0
 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

Adf

Out in the Cold

Posted on by 
So, suddenly, silver and gold
Are both getting bought and not sold
But oil’s still rising
So, what are folks prizing?
Perhaps risk’s now out in the cold

At least, here at home that’s the case
As AI stocks sell off apace
And what of the buck?
It’s basically stuck
While bonds are just standing in place

Arguably, the biggest change in market relations in the past two sessions is that the metals markets have rallied alongside the price of oil.  Since basically the beginning of this conflict, this has been one of the conundrums in markets.  Gold, which has a long history as a safe haven, started selling off (granted from a parabolic move) shortly before the US attacked Iran.  In fact, many ascribed the sell off to the naming of Kevin Warsh as Fed Chair given the view he was the most hawkish of the potential candidates.  But once the fighting started, gold continued to decline, falling some 27% from its initial burst higher at the beginning to its recent low, below $4000/oz.

Source: tradingeconomics.com

Of course, the oil story is quite different as there were far more twists and turns in the price action as the military activity ebbed and flowed and as comments about ceasefires and peace talks were made and denied on a regular basis.  

Source: tradingeconomics.com

But certainly, the impression from the recent price action was that when oil rallied, gold sold off and vice versa.  The ostensible rationale was that higher oil prices would drive inflation higher and interest rates would follow thus reducing the attractiveness of holding gold.  And perhaps that was true, at least to some extent.  However, that was never a satisfying explanation to me.  And, throughout the conflict I have maintained that the medium and long-term views for the metals was quite positive.

However, something seemed to have happened yesterday, and I see no indication of exactly what that was, but we saw oil, gold and silver all rally nicely on the day.  The oil story is clear as the latest issue is the Houthis now blocking Saudi ships from traversing the Bab-al-Mandeb at the southern tip of the Red Sea and reducing flows.  But the metals story remains a mystery.  Granted, this has only been ongoing for a bit more than twenty-four hours, but the magnitude of the metals moves (Au +3.0%, Ag +5.7%) in the past two sessions is pretty substantial for markets that had been doing very little but sliding for months.

Source: tradingeconomics.com

I don’t believe this has been short covering, as in reality, both markets had lost speculative interest given the lack of volatility over the past months, and so short sellers were not involved.  There were far too many other, juicier targets for them.  As to the dollar, which has long had a negative correlation to the precious metals, as it has traded in a 1% range for the past month, as per the below chart, it is hard to ascribe much causality there.

Source: tradingeconomics.com

However, I sense that we are beginning to see some changes to the relationships that have held for the past several months, so we need to be alert for other seeming anomalies.

Turning to the other markets, and continuing with FX, while generically today, it is doing very little as per the below screenshot,

Source: tradingeconomics.com

It is worth discussing the yen, which yesterday traded below (dollar above) the 163 level for the first time since 1986.  Not surprisingly, we heard from FinMin Katayama as follows: “The situation involving the US and Iran has taken a sudden turn for the worse — a deterioration that the world did not foresee — creating a very difficult environment. Our policy remains completely unchanged: We will take appropriate and bold action at any time, should the need arise.”  However, as I have maintained, given the incredibly slow pace of the decline of the currency and given that speed of decline and the volatility in markets has always been an important part of the MOF’s decision matrix regarding intervention, it seems we are not near that step.  One need only compare the JPY to KRW, a currency with low historic volatility, to see that the yen has not been very active.  In fact, the biggest movements have been caused by the MOF in their intervention and comments.

Source: tradingeconomics.com

There has been an increase in market discussion regarding whether the BOJ is going to hike rates again at the end of this month, which is not the market forecast, nor would it be considered the norm given they hiked rates last month.  Most analysts expect the pace of rate hikes to be every six months as they gradually tighten policy.  Of course, they could change that, but again, the yen’s weakness has many fundamental drivers with rates being only one of the issues.  Personally, I don’t see a hike next week, but I guess anything is possible.

Which leaves us with bonds where yields around the world are creeping higher on a regular basis, Treasuries +1bp, European sovereigns +3bps today, and equities.  Yesterday was a solid day in the stock market in the US with tech stocks leading the way higher.  And while Europe is following suit this morning (UK +1.2%, France +0.8%, Spain +1.0%, Germany +0.3%), last night’s Asian markets were less buoyant.  Tokyo (-0.2%), China (-0.5%) and HK (-1.0%) led the charge lower although there were some bright spots, notably Singapore (+1.2%), Taiwan (+1.3%) and Korea (+0.7%).  I guess overall it was a mixed session.  As to US futures this morning, as I type at 8:05 they are pointing lower led by NASDAQ futures (-1.5%).  

Net, some of the relationships with which we had become familiar seem to be breaking up a bit.  I think no matter how you slice the equity market, it is trading at rich levels, so a correction of some sort seems realistic.  I presume that if the tech earnings next week disappoint, we will see a pretty big downdraft.  As to oil, while there is still plenty around, the war drums are beating louder and that is not helping things.  But bonds and the dollar are sitting this move out, at least for now.

There is no data released today and the Fed is in its quiet period, so we remain beholden to headlines from Iran, the White House and other earnings outcomes.  I have a sense of uneasiness about the day, but nothing to put my finger on.

Good luck

Adf

Many Critiques

Posted on by 
This evening the president speaks
And pundits have many critiques
Meanwhile in Iran
There’s no clear game plan
As havoc, the president wreaks

But right now, seems traders don’t care
‘Bout Persia or any warfare
Instead, soft inflation
Has changed the narration
So, pundits, high rates now foreswear

Some days, it’s simply more difficult to find stories that bring coherence to the narrative.  But let me try.  Yesterday’s PPI data was also much cooler than forecast, although still clearly quite high on a year over year basis, but it certainly added to Tuesday’s CPI result and has changed a lot of views regarding the Fed’s future actions.  For instance, if we look at my favorite CME table for current probabilities of future rate moves, we see that there is now just a 10% probability of a hike in two weeks’ time, and just one hike priced in for the next 18 months.

Remember, Monday, there was a 40% probability of a hike priced for the July meeting and two+ hikes priced through 2027.  (As I recall, I was an advocate of fading that price action.)  I expect that this will alter the narrative as calls for an immediate rate hike to burnish Warsh’s, and the Fed’s, credibility are likely to fade away.  In the meantime, he didn’t say anything new at the Senate testimony and the rest of the Fed talking heads continue to reiterate that they would be comfortable raising rates if inflation pressures rise.  Remarkably, they didn’t seem to notice the recent numbers.

Turning to the Strait of Hormuz, the US blockade of Iranian vessels is back in force and there have been a significant number of new US attacks on Iranian military sites.  As well, the IRGC has fired drones/missiles at several tankers trying to exit the Strait on the Omani side.  I read this morning that the president is considering whether to escalate things by attacking Kharg or Qeshm Islands, two key Iranian strongholds, and my guess is if that were to be the case, the oil market would likely take a turn higher.  But right now, WTI is effectively unchanged on the day, and has been since Monday’s rise.  I guess $80/bbl +/- is the new home.

Source: tradingeconomics.com

As to the President’s speech tonight, the word is it is going to involve election related issues, seemingly regarding the integrity of elections, the SAVE Act and the results of the 2020 elections.  Recall, Tulsi Gabbard, before she resigned to care for her husband, declassified a great deal of information and some portion apparently was election related.  Alas, this will simply further stoke partisan feelings as there is very little evidence that showing proof of something political has the ability to change the opposing viewpoints of partisans.

So, away from oil, we are now into earnings season, and the big banks all had monster quarters while there is growing angst over the AI sector and whether the main players will be able to make the money that was assumed for so long.  So, while yesterday saw US indices trade higher, the overnight session has been far less positive.

Starting in Asia, Tokyo (-2.8%), China (-1.9%) and Korea (-6.4%) all felt the pain of semiconductor weakness although HK (+1.3%) bucked the trend with most of the rest of the region showing far less movement in either direction.  There was precious little data to drive things, so this clearly seemed to be tech sector woes.  In Europe, broad, but modest, weakness is today’s theme with both France and Germany lower by -0.65% with Spain (-0.5%) also under pressure and the UK (-0.3%) the best of the bunch after GDP data was mildly better than the last reading at 1.3% Y/Y in May.  While the Trade Balance improved a bit, IP was weak and although it has been spun as a positive report, it hardly quickens the pulse.  Meanwhile, at 7:20 this morning, NASDAQ futures are lower by -1.1% although the other two major indices are little changed.  Tech is definitely under pressure here.

In the bond market, this morning we are seeing yields higher by basically 2bps across the board in Treasuries and European sovereigns.  Much is being made of the French OAT 30-year yield this morning as it trades to its highest level since the GFC as per the below from barchart.com.

While this headline of the highest rate in X years is splashy, what we have been seeing consistently, across all nations, is that debt issuance continues to rise and central banks have not been absorbing nearly as much as they had in the more recent past.  This means that the private sector needs to buy bonds, and they are demanding higher yields.  Someone made the point (and I cannot remember where I first read it, but it is valid) that bond yields appear to be less about inflation concerns, per se, and more about the ability for markets to absorb the ever-increasing amount of debt being issued by governments…and companies.  Just look at how much debt is being issued by the hyperscalers to fund their AI buildout.  Regardless of what happens to the front end of the curve and central bank rate activities, it does feel like the back end of the curve is where the signal is going to be found going forward.

Precious metals continue to bat about, rallying and then giving those gains back, but net remain under pressure as gold (-0.75%) and silver (-1.9%) are both softer this morning although copper (+0.7%) continues to find support.  It is difficult to look at the gold chart and be optimistic about a reversal of fortune in the near-term.  

Source: tradingeconomics.com

However, as per the discussion above regarding the increasing issuance of government debt around the world, at some point, the larger fiat vs. physical stores of value question is going to reassert itself and gold will be one of the main beneficiaries of that story.  Alas, it has a history of doing nothing from a price perspective for years on end.

Finally, the dollar, which suffered yesterday, with the DXY slipping -0.5%, is not very interesting this morning.  the pound, interestingly, has slipped -0.3% despite what many are trying to spin as a positive GDP report.  The other noteworthy mover is KRW (+0.4%) on the back of the BOK raising interest rates by 25bps to 2.75% last night.  While this was widely expected, the rhetoric about faster growth driving the need for higher rates has been a boon to the won.  (And remember, this was despite the KOSPI getting crushed last night on weakness in the two big semiconductor firms.)

On the data front, this morning brings the weekly Initial (exp 217K) and Continuing (1820K) Claims as well as Retail Sales (0.2%, -0.1% ex autos) and the Philly Fed (13.0).  With the recent surprises in CPI and PPI, I’m sure there will be a lot of focus on this morning’s Retail Sales data.  Certainly, a weak number will feed into the new, growing narrative, that the economy is slowing and rate hikes are slipping from view.  But yesterday’s Empire Mfg number was quite strong. There are still many inconsistencies in the data, which if nothing else, allows every analyst to point to something and claim they are right.

Ultimately, to me the great concern is an escalation of US activity in Iran, especially bringing troops into play.  In that case, I think things would change a lot, and we could well see another jump in oil prices.  But absent that, right now there is a lot of noise, but not much signal.  I don’t think the big picture has changed, i.e. investment into the US remains strong and that is going to support both the economy and the dollar.  But there will be many twists and turns.

Good luck

Adf

Much Hotter

Posted on by 
This weekend both wars got much hotter
Iran attacked ships on the water
Ukraine sent its drones
Across three time zones
And struck inside Vlad’s magna mater

Thus, oil has risen a bit
While gold and stocks both trade like sh*t
And soon, CPI
Will prove or deny
That views at the Fed are now split

By now, of course, you know that there has been more military activity in the Strait of Hormuz with the IRGC attacking commercial ships and the US retaliating with significant strikes of military sites along the Strait.  From what I can see, there are factions within the IRGC that do not want to end the conflict and whatever government exists within Iran has no control over them.  As such, it is no surprise that the price of oil (+3.5%) has risen, but even in this scenario, it is well off its overnight highs.

Source: tradingeconomics.com

At this point, I believe the trading community will need far greater proof that there is a shortage of oil before responding with significantly higher prices.  Of course, one way that could come about is if Ukraine continues its success with attacks on Russian oil infrastructure as there has been an uptick in that activity with several refineries having been hit in the past several days and Russia imposing an export ban on diesel.  Net, things in the oil space remain precarious, but for all the analysts who continue to promulgate the idea that the end is nigh, markets continue to disagree.  As always, I vote with markets here.

And, not surprisingly, other markets have responded in a similar fashion to their recent trends with higher oil prices leading to pressure on both stocks and bonds, as well as precious metals while the dollar finds some support.  The thing is, my take is the strength of these correlations has been waning somewhat.  Frankly, and remarkably, it appears as though an increase in military activity in the Strait of Hormuz has become somewhat normalized to traders and they are looking for other, fresher signals as to their next move.

What might those other signals be?  Well, much was made of SK Hynix’s IPO in the US on Friday, which many pundits are now calling the top as the stock fell sharply in Korea overnight, down -15.4% dragging the KOSPI down -9.0% and tech stocks, in general much lower.  Of course, the KOSPI had risen dramatically over the past year, as you can see below, and is still higher by more than 100%  in the past year despite the recent decline of more than 25% since its peak on June 22.

Source: finance.yahoo.com

The problem with calling the top in stocks is that the earnings data, which starts in earnest this week, has been pretty good so far.  If companies continue to earn real profits, investors will continue to purchase stocks.

So, where else can we turn for new information?  Tomorrow brings the latest CPI report (exp 3.8% headline, 2.9% core), and you know that will be heavily scrutinized as the punditry tries to determine the FOMC’s reaction function and if it has changed with the new Chairman.  At this point, I do believe the Fed’s reaction function has changed, and more importantly, I don’t think anybody knows what it will be like, the Fed included.  The previous Fed whisperer, Nick Timiraos at the WSJ put out an article overnight discussing the idea that Chairman Warsh needs to decide whether to undo the most recent rate cuts.  However, there is no evidence that Warsh speaks to Timiraos and based on everything Warsh has said, he is not likely to tip his hand.  Chairman Warsh does testify to Congress this week, but I expect he will deflect all questions about the future path of monetary policy, and let’s face it, with the likes of Maxine Waters on the House committee, they won’t understand anything he says anyway.

And really, those are the only things that I think matter for now, so let’s review the overnight activity in markets.  As mentioned above, stocks are generally under pressure, but not universally so.  For instance, in Asia, Tokyo (-1.9%), China (-1.8%) and the aforementioned South Korea all had rough sessions, but HK, Taiwan, India and Australia were all basically flat on the day.  The big surprise is Taiwan as given the semiconductor weakness; I would have thought that market would have been significantly impacted.  But I guess not.  Meanwhile, European investors appear to be completely focused on tomorrow’s France-Spain World Cup semifinal as equity indices there are virtually unchanged this morning.  As to US futures, at this hour (7:30) NASDAQ futures are weaker by -1.2%, but the other markets are little changed.

Bond yields are higher this morning, but not hugely so.  Treasury yields have edged up by 1bp, and European sovereign yields are higher by 2bps across the board with UK Gilts (+4bps) the real laggard there.  Overnight, JGB yields backed up 4bps as well, but that story has more to do with the GPIF than anything else.

Remember Friday?
Japan was bringing home yen
They were just kidding

Think back to Friday.  Japanese FinMin Katayama mentioned that the GPIF and other Japanese pension funds ought to consider investing more money in Japan and less abroad.  That got tongues wagging about a major policy change coming that would serve to support the yen, and the JGB market while undermining Treasuries as the idea was the GPIF would sell their US Treasuries and buy JGBs instead.  Well, it turns out that is not actually the case.  The GPIF reevaluates its policy annually but has expressed no urgency to change things now despite the FinMin’s comments, at least according to Reuters.  The upshot is that JGBs sold off as did the yen (-0.3%) as per the below chart.

Source: tradingeconomics.com

Perhaps more surprisingly, though, the dollar is mixed on the day, not higher across the board as might have been expected given the uptick in oil and military activity.  So, we have seen weakness in GBP (-0.1%), AUD (-0.2%) and INR (-0.5%) while EUR (+0.1%), NZD (+0.2%), NOK (+0.3%) and KRW (+0.4%) have all had decent sessions.  Net, the DXY is essentially unchanged this morning.

Finally, and quickly, both gold (-1.5%) and silver (-2.0%) are under pressure with the higher oil price although copper (+0.6%) continues to find support and remains well above $6.00/lb.

In addition to the CPI data, it is a pretty busy week as follows:

TuesdayNFIB Small Biz Optimism95.6
 CPI-0.1% (3.8% y/Y)
 -ex food & energy0.2% (2.9% Y/Y)
 Warsh Testimony 
WednesdayPPI-0.1% (6.2% Y/Y)
 -ex food & energy0.3% (5.2% Y/Y)
 Empire State Mfg8.9
 Warsh Testimony 
 Fed’s Beige Book 
ThursdayInitial Claims218K
 Continuing Claims1811K
 Retail Sales0.2%
 -ex Autos-0.1%
 Philly Fed13.5
FridayHousing Starts1.30M
 Building Permits1.40M
 IP0.2%
 Capacity Utilization76.2%
 Michigan Sentiment51.5

Source: tradingeconomics.com

We also hear from 9 other Fed speakers (it almost seems like they didn’t get the memo about reducing communication) but with Warsh on the stand both Tuesday and Wednesday, I don’t think the others will matter that much.  Of course, it will be interesting to hear the other speeches if CPI comes in softer than expected as it may put a crimp in the hawks’ views.

In the end, not that much has really changed I would argue.  The war is an exogenous variable, and the market has learned to largely ignore it.  The Fed is still too uncertain in its new construction for many views to have changed, but I think the one thing we can conclude is that the old models of their reaction function are no longer viable.  My take is the beauty of the task forces for Chairman Warsh is they won’t report for at least 3 months, and probably more like 6 months, so until they report, absent a massive spike in measured inflation, the Fed is not going to do anything.  The Fed funds futures market is now pricing a one-third probability of a hike at the end of this month and certainty of one and 50% probability of two by the end of the year.  I would fade those trades.

Good luck

Adf

Discussing Their Plight

Posted on by 
Now, all eyes will turn to the chat
When Warsh and his minions, they sat
Round oak polished bright
Discussing their plight
‘Bout prices and jobs and all that

But since they met three weeks ago
Chair Warsh very clearly did show
His view that inflation
Was short in duration
And rate hikes were not apropos

It is getting increasingly difficult to maintain a hawkish Fed view as both the data and the Chairman are working against you.  While we all enjoy the World Cup this week, arguably the biggest market related news will be Wednesday’s release of the Minutes from the last FOMC meeting.  You may recall that in the wake of that meeting, interest rate hawks were in the ascendancy with an October hike fully priced and odds for a second, December, hike priced as well as you can see in the below CME table from June 24th.

Now, in the wake of that meeting and the press conference, the combination of the dot plot showing half the committee expecting a hike this year and the lack of forward guidance along with the succinct statement explaining the Fed would achieve their 2.0% inflation mandate had many analysts expecting a serious tightening cycle upcoming.

But a funny thing happened on the way to the next FOMC meeting, still three weeks hence, the price of oil, and energy in general, accelerated its decline.  Given how much effort was made to explain that the core inflation readings were heading higher because of the impact that energy has on everything, hence the need to hike rates, this has been an inconvenient outcome for the hawks.  Add to that Chairman Warsh’s comments at Sintra, Portugal last week, regarding the easing of inflationary pressures as energy prices decline (oil -0.9% this morning) and futures traders have been adjusting their views pretty steadily as per this morning’s CME table.

While a hike is still assumed by year end, the second one has fallen by the wayside.  Personally, as we continue to see inflation pressures subside alongside energy prices, I expect that not only will we not see a hike this year at all, but a cut by December is viable.

Adding to the downward bias on Fed funds futures was Thursday’s payroll report, where the headline number was softer than expected, although the Unemployment Rate did slip another tick to 4.2%.  I think a key problem with using the Unemployment report as such a critical signal is the fact that since President Trump’s inauguration and the actual closing of the Southern border, as well as the deportation (by both the government and on a self-basis) of somewhere between 2.5 million and 3.0 million according to Grok, the old econometric models of what type of job growth was necessary to maintain solid economic growth are no longer terribly useful. If we throw in the dramatic changes to the economy on the back of the increase in AI as a tool and infrastructure investment, it becomes increasingly difficult to utilize the old models.  Too, one of the main themes from several months ago was that AI was going to replace hundreds of thousands of jobs and unemployment would skyrocket, while now, those ideas are being rethought with many analysts now expecting AI will support more jobs.  Perhaps, the best thing that can come of this change is that markets will no longer radically adjust based on an outdated statistic.

There is still a long way to go before the next FOMC meeting and I doubt that the many task forces will have come to any conclusions yet, but if energy prices continue to decline, and I couldn’t help but notice this WSJ article discussing the sudden glut of oil driving prices lower, and I am growing increasingly confident in my views.

Which takes us to the currency that most needs to see a more dovish FOMC, the yen (-0.6%).  You may remember last week when the yen, after making yet another new low for the move, suddenly reversed course ahead of the July 4thholiday.  While there was no actual intervention, the discussion was that the MOF would no longer discuss their intentions ahead of any intervention and with a holiday weekend seeing reduced liquidity, many anticipated some action.  Well, as you can see from the chart below, that idea has essentially been erased with the yen softening again and pushing back to those lows seen last week.

Source: tradingeconomics.com

Bloomberg ran an article this morning about a former Vice Minister from the MOF explaining his view that the yen was undervalued by 20% or so.  If we look at the yen on a PPP basis, the IMF claims the value should be about 93-95 instead of the current 162+.  The Economist’s Big Mac Index calls for 78.00, and by all accounts, visiting Japan is relatively inexpensive for most foreigners.  In fact, I read that Japan was increasing the visa fees to try to discourage the massive amount of tourism as people around the world see it as a cheap destination.

Ultimately, the problem with the yen, in my view, remains that real interest rates remain deeply negative and the government’s spending plans continue to indicate massive deficits as far as the eye can see.  While reduced energy prices are a boon, the yen was falling sharply long before the Iran conflict began.  Policy changes of substance are required, and they are still uncomfortable for domestic politics.  While the pace of the yen’s decline may slow, I still see it weakening going forward.

So, let’s briefly look at markets overnight before closing.  Regarding the dollar, it is broadly stronger this morning with only BRL (+0.3%) finding any support despite their ignominious defeat to the Norwegians.  But modest slippage across the G10 is the rule, -0.1% to -0.2%, while similar movement has been observed in the rest of the EMG space.  For now, the yen remains the only interesting currency.

In the commodity markets, despite oil’s continuing slide, this morning the metals (Au -0.4%, Ag -0.6%, Cu -0.1%) are also under pressure, but that accords with the dollar’s strength.  As long as the dollar remains bid, it appears the metals markets will have difficulty gaining traction.  But if I am correct regarding the Fed and the market turning toward a more dovish view, I would look for the metals to head higher again.

In the bond market, Treasury yields (-3bps) are slipping as the market reopens after the holiday weekend, arguably following through on the softer payroll data.  European sovereign yields are little changed to lower by -1bp amid a quiet market while JGB yields (+4bps) are the notable outlier, arguably as concerns rise over the weakening yen.

Finally, equity markets remain beholden to the semiconductor and AI trade and with the US having been closed on Friday, there was less information for the rest of the world.  But this morning, NASDAQ futures (+0.9%) look like they are set to resume their march higher, dragging the S&P with them.  But this follows a mixed to lower session in Asia (Tokyo 0.0%, China 0.0%, HK +1.1%, Korea -0.5%, India +0.7%, Taiwan -0.5%) as leadership was lacking.  Not surprisingly, European bourses are also mixed this morning (Spain -0.7%, UK -0.2%), Germany and France both +0.1%) as the question of note is how much defense investment is going to be forthcoming from NATO and European nations and how much of that will be spent in Europe.  Perhaps excitement in the US will help global risk appetite as the day wears on.

On the data front, it is a quiet week for numbers with just the below on the docket:

TodayISM Services54.0
TuesdayTrade Balance-$78.0B
WednesdayFOMC Minutes 
ThursdayInitial Claims220K
 Continuing Claims1810K
 Existing Home Sales4.20M

Source: tradingeconomics.com

As well, we hear from three Fed speakers, Waller, Williams and Logan. Now it will be interesting to see if any of them start to discuss the lower energy prices and how that is likely to moderate their inflation concerns.  If we do hear something like that, I expect the Fed funds table above will reflect that quickly.  We shall see.

It is summer, and there is not much new to discuss.  With the US playing Belgium tonight, all eyes will be there, and my take is we are not looking forward to a terribly exciting session today.

Good luck

Adf

‘Pocalypse Dreams

Posted on by 
Though many have preached the buck’s dead
The greenback keeps moving ahead
And right now, it seems
Their ‘pocalypse dreams
Are still all confined to their head(s)

But narrative writers ignore
Whatever they said from before
Right now, it’s the buck
That’s causing bad luck
As rate hike bets all start to soar

In a fairly rare set of circumstances, the dollar has drawn the spotlight in markets for the past few sessions.  While it always matters to some extent, it is rarely seen as the cause of many other market movements, just a coincident one.  But right now, I read more about how the strong dollar is driving equity weakness and commodity weakness as more and more bets get placed on the Fed hiking rates aggressively to address inflation by the end of the year.

Using the DXY as proxy, the first chart is the one everybody wants you to focus on, showing the last year and how we have had a clear break above the trading range top of 100.50 and now people are creating targets for just how high it can go.

Source: tradingeconomics.com

And it certainly can go higher, as a quick step back to get some more perspective shows where the dollar has been during the past 5 years. It seems to me I could create a narrative that the dollar has been massively undervalued over the past 18 months, and this move is simply returning it closer to its longer-term fair value.  In fact, just eyeballing, it seems quite reasonable to think the 5yr average of the DXY is somewhere around 103-104 (subsequently confirmed with Grok), still a few percent higher than current levels.  Reversion to the mean anyone?

Source: tradingeconomics.com

All of this, though, begs the question, are rate hikes really on the near-term horizon?  I remain firmly in the camp that is not the case.  Fortunately, someone on my side is super smart, Bob Elliott, former hedge fund manager at Bridgewater.

On the rate hike front, the below CME probability table has barely changed from yesterday as the narrative is strong that rate hikes are coming.  

I cannot really understand why this is suddenly the belief set given the fact that the key driver of recent higher inflation data has been the price of oil, and that price continues to fall, down a further -2.0% this morning.  I understand that gasoline prices have not fallen quite as dramatically, but nothing about the chemistry has changed and I remain highly confident that those prices will be falling as well, catching down to oil.

Source: tradingeconomics.com

So, I remain confused as to why everybody seems to believe the Fed, which despite a new Chair remains the same institution that observed inflation run higher for years during Covid and calling it transitory, has become the reincarnation of the Bundesbank.  In fact, the only rationale I see is that other than Waller, Warsh and Bowman, who were all appointed by Trump, everybody else in that room has TDS and is terrified that things will work out such that by the time the election rolls around, the economy is ticking over nicely with inflation a historical issue.  And frankly, I think most of them do share that affliction.

But other than Powell, and Cook to some extent, none of them have really felt the force of the critiques that come with upsetting President Trump, and frankly he didn’t care about Cook per se, she was just a convenient target to get ousted so he could put his man in there.  And in fairness, Cook is a massive dove, and should agree with Trump on this policy, but I’m sure she doesn’t because…Trump.  I am confident none of them signed up for being in that spotlight.

Apparently, BOA is calling for 3 rate hikes this year in the final four meetings.  I think that’s nuts, but futures are pricing a 2/3 chance of a hike at the end of July, which I also think is nuts.

The recent hiccup in stocks, and the steadier downturn in commodities has been blamed on dollar strength which is being driven by expectations of rate hikes coming soon.  While I like the dollar in the long-term, that is because I believe investment flows into the US will drive it, not financial arbitrage flows.  As things evolve, I expect the market to understand the Fed will not be hiking rates and narratives will need to find a new bogeyman.

Ok, let’s tour markets quickly.  Yesterday’s equity market selloff in the US, following the tech selloff in Asia closed well off the lows and futures this morning are pointing slightly higher.  Asia was mixed overnight with Korea (+3.3%) rebounding sharply although there was weakness in Japan (-0.9%), Taiwan (-2.25%), Indonesia (-3.6%) and the Philippines (-2.2%).  But on the flip side, China (+0.5%), HK (+0.3%) and India (+1.0%) all followed Korea while other regional exchanges had much more limited movement.  It appears that people are trying to figure out what to do for now.

In Europe, Germany (-1.0%) is the laggard after Germany cancelled its plans for a new warship and Rheinmetall, the company set to win biggest there, got crushed.  But elsewhere +/-0.3% or less is the norm with little new information as traders await the next shoe to drop.

In the bond market, interest is low as 10-year Treasury yields continue to track around the 4.5% level and movement has been 1bp or so lower across all of Europe.  Nothing to see here for now.  Just wait until views start to change on rate hikes though!

Metals markets continue to get hammered with gold (-1.7%), silver (-2.9%) and copper (-1.6%) all still falling as the opening narrative about higher rates and a stronger dollar play out.  The thing is, I think the fundamentals remain positive for metals markets as there continues to be central bank demand for gold as well as industrial interest in silver and copper and long-term shortages of supply.  But right now, none of that matters.

Finally, looking beyond the DXY, it is no surprise the euro (-0.35%) and pound (-0.35%) are lower given the DXY’s continued rise, but the yen (-0.1% and at a new low (dollar high) for the move) continues to slide and there is weakness pretty much across the board in both the G10 and EMG blocs.  KRW (-1.0%) is today’s laggard while INR (+0.2%) is the lone currency holding its own.  This continues to be a dollar focused story so when the rates story changes, so will the dollar.

On the data front, we see New Home Sales (exp 640K) and then EIA Oil inventories with yet another large draw expected.  And that’s it for today.  As long as this rate hike narrative remains primary, look for weaker risk appetite and a strong dollar.  But I think it is a short-term phenomenon.

Good luck

Adf

There’ll Be Chagrin

Posted on by 
Since April, the story has been
The stock market’s yang with no yin
But yesterday’s fall
Reminds one and all
Be wary or there’ll be chagrin

Since the beginning of April, as you can see in the below chart of the S&P 500, stocks have risen sharply (~18%) as up days outnumbered down days 33 to 12, including yesterday’s drop.  That’s a pretty good definition of a raging bull market.

Source: tradingeconomics.com

Here’s the thing; nothing really changed yesterday.  Certainly, there has been no change in the status with the Iran conflict, and therefore no change in the prospects for oil prices going forward.  If anything, the data we have been getting has been demonstrating that the US economy is performing better than expected with yesterday’s ISM and Factory Orders data stronger than forecast as was the ADP Employment Report.  If you add that to the JOLTs data from Tuesday, it appears that the overall jobs situation in the US is diverging from the narrative that AI is going to take all the jobs and there is nothing left for people to do.  In fact, a look at the Citi Surprise Index, designed to show the difference between actual economic releases and the forecasts ahead of those releases shows it has risen to its highest level since mid-2023 as per the below chart.

This is a strong signal that the economy, despite a lot of negative talk, is doing pretty well.  Of course, by now we have all learned that the stock market and the economy are very different things.  While historically, the relationship between equity markets and the economy was clearer, with equity markets a reasonable estimator of future economic activities, with somewhere between a 6 month and 1 year lag, ever since the GFC and the financialization of the economy, that relationship has lost much of its luster.  Rather, akin to my discussion of the yen being dependent on capital flows, not economic activity, that is also the story of stocks right now.

This brings us to the story that really seems to be percolating around the market, and that is the imminent IPO’s of SpaceX, Anthropic and OpenAI, as well as Google’s $80 billion share sale.  For the last 30ish years, between share repurchases by companies and the growth of Private Equity which gobbled up public companies, the number of publicly listed company equities has been shrinking, with the number falling roughly in half during that period.  According to Grok, at the end of 2025 there were just 3,657 domestic companies listed on US exchanges, not even enough to fill out the Russell 5000!  With that in mind, and remembering the laws of supply and demand, it ought not be a surprise that prices rose while supply fell.

But is that getting set to change?  While headline companies like SpaceX will get all the press, it seems likely that PE firms are going to be looking to IPO many of their holdings given current overall valuations.  Remember, many of these companies were bought during the era of ZIRP, so debt financing made lots of sense, but once the Fed tightened policy, it has been a problem.  Retail investors have been hoovering up equities for a while now, and I suspect we are going to see a lot more equities come available to meet that demand.  In fact, this is the best story I have heard about what can halt the rally.

But this can also highlight the difference between the economy and the stock market.  Consider the ramifications of the mega names issuing stock and using the funding to continue to build out the AI infrastructure including data centers, power production, turbines, semiconductor fabs, etc., that is all going to result in significant economic activity as people get hired to do the work and all the benefits that accrue from investment lead to real growth in GDP.  We could easily see equity markets stall, or stumble while the economy powers ahead.  Something to consider for the medium-term view here.

But in the short-term, let’s turn to markets and see how yesterday’s US declines played out overnight.  Asia had a generally miserable session with every major and most other regional exchanges sliding.  This included Tokyo (-1.4%), HK (-1.5%), China (-0.7%), Korea (1.8%), Taiwan (-1.7%) and Australia (-1.1%).  And the smaller markets were no better as India (0.0%) was the top performer.  In Europe, though, the picture is not so dire as only the UK (-0.9%) is under real pressure with the continent (France +0.6%, Germany +0.35% and Spain +0.25%) all managing small gains.  Perhaps the driver here has been inflation data which showed that it has not risen as fast as feared and therefore there is a bit less concern about more aggressive ECB tightening.  As to US futures, they are mixed this morning with NASDAQ (-1.35%) falling sharply on poor Broadcomm earnings although the DJIA (+0.7%) are rebounding from yesterday’s losses as investors rotate a bit from tech to industrials while oil prices have slipped aiding things.

Speaking of oil (-2.3%), it appears to be responding to comments that the US will not resume an all-out war absent the death of US troops.  At least that’s one rationale, although the idea of the price heading back to its recent average is viable as well.  However, this has helped metals markets (Au +1.25%, Ag +1.8%, Cu +0.5%) as that relationship remains quite solid.

In the bond market, yields are also responding as would be expected with Treasuries (-3bps) leading the way as European sovereign yields all slip between -1bp and -2bps.

Finally, the dollar is giving up some of its recent gains but as you can see in the chart below for the DXY, during the past 3 weeks, the index has traded between 98.85 and 99.55, a very tight range and indicative of the general lack of movement in the dollar.

Source: tradingeconomics.com

However, that is the dollar writ large vs. major currencies.  Against several Asian currencies, the story is not the same.  The below chart shows the Korean won, Indonesian rupiah and Philippine peso, all of which are trading at their lowest levels since the GFC as the pressure from higher oil prices and reduced supplies has really impacted their economies and currencies by extension.

Source: tradingeconomics.com

As to the JPY, it managed to trade through 160.00 yesterday, but only just, and this morning sits just below that level with no sign of the BOJ/MOF.  The Japan story remains the same, but the changes required there will be politically fraught.  However, for the smaller Asian nations, much is out of their hands, and my sense is that while they will all seek to mitigate the pace of decline, there is very little they can do to stop it on their own.  That will require the Iran situation to end and oil prices to head back lower with supplies rebuilding.

On the data front, this morning brings the weekly Initial (exp 213K) and Continuing (1780K) Claims data as well as Nonfarm Productivity (0.5%) and Unit Labor Costs (2.5%.  Too, we hear from several more Fed speakers but given all the other things that are ongoing, their words don’t seem to move markets.  For instance, yesterday Dallas Fed president Logan said she thought inflation pressures indicated rates may need to rise.  But she is a known hawk, one of the hawkish dissents at the last meeting, and thus this is not new news.  Below is the CME’s futures probability page for the December meeting which shows a slightly more than 50% chance of a hike by then.  However, if you look at the table at the bottom, you can see that the probability has been creeping higher in the past month, although that is just as likely on the back of the better data than any Fedspeak.  Certainly, next week’s first Warsh chaired meeting will get a great deal of attention.

And that’s really it for the day.  In the FX market, as well as bonds frankly, I don’t expect anything of note.  Oil looks to be drifting lower while metals drift higher and the real wild card is equities, which have been showing inordinate strength.  My thoughts above reflect my views for potential later in the year, not today.

Good luck

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One Sixty

Posted on by 
The asymptote nears
Will they act at One Sixty?
Can they afford to?

Yesterday saw the yen edge ever closer to the 160 level, the point at which the MOF/BOJ acted in April.  Frankly, looking at the chart, it reminds me of an asymptotic limit from calculus, but the one thing we know is there is no natural limit, only whatever artificial one is imposed (or tried to be imposed) by the Japanese government.

Source: tradingeconomics.com

The market continues to price a high probability, ~86% according to the OIS market, of a 25bp hike by the BOJ next week, and I’m confident they will do that.  But to me, the question is, will it matter to the FX markets?  Here’s the thing about FX, typically there are two separate, but related, drivers of the relative value of one currency vs. another.  The most common discussion is about short-term interest rate differentials, typically proxied by central bank base rates.  Below is a chart of the past ten years of data for Fed funds (grey line), BOJ base rate (blue line) and USDJPY (brown line).

Source: tradingeconomics.com

It is abundantly clear that there is a strong relationship here, as US rates shot higher in the post-Covid inflation bout and USDJPY shot higher as well.  Now, since the Fed started cutting rates back in September 2024, while Japanese rates have edged higher over the same time frame, it would be reasonable to assume that USDJPY should retreat somewhat.  However, as you can see in the first chart, that is just not happening.  In fact, the pressures are the other way, with far more weakness than strength.

Why, one might ask, is this the case?  This takes us to the other major factor in FX rates, relative capital flows.  Nations that see substantial inflows in capital will typically see their currencies appreciate.  Now, ask yourself, which nation sees the biggest inflows of capital in the world?  Yes, the US, as the capital account surplus is the mirror image of the massive current account deficit that we run.  In fact, if you look at the below chart, it shows the relative current accounts of Japan (grey bars) and the US (blue bars) in percentage of GDP which most recently showed -3.6% for the US and +4.7% for Japan.

Source: tradingeconomics.com

Now, let’s do the math.  US GDP is ~$28.8 trillion while Japanese GDP is ~$4.4 trillion.  3.6% of $28.8 trillion = ~$1.037 trillion of capital inflows.  4.7% of $4.4 trillion = $202 billion of capital outflows.  Of course, we know that everybody in the world is piling into US technology stocks, and that is where the capital is mostly flowing, but in order to do so, they are buying USD.  This is true of Japanese investors as well as others around the world.  

There is a narrative that is developing that claims as the Japanese raise interest rates, the massive, short yen positions that exist to fund many speculative trades will unwind, and with that, the yen will strengthen dramatically as well as we will see many other markets sell off sharply as those positions unwind.  But the NASDAQ is up 21% YTD and 40% in the past year.  If you are an investor and you are funding a speculative position at 0.75% annually that rises to 1.00% while you are returning 40% on the other side, do you really care?

To my eye, for the yen to change course, intervention is irrelevant, and so is a 25bp rate hike.  We need to see a wholesale change in the combination of Japanese fiscal and monetary policies as well as changes in those policies in the US.  Historically, a tight monetary and loose fiscal policy combination will strengthen a currency (something that the US currently has), but can Japan afford to tighten monetary policy that much?  My money is on no, and while 25bps seems pretty certain next week, I would not be looking for USDJPY fall very far, if at all.  And remember, the market is pricing a 50% chance of a Fed hike by the end of the year.  Don’t be taken in by this story in my view.

Away from this issue, it is difficult to find other critical news.  Yes, there was another skirmish in Iran straining the concept of a ceasefire, but all-out war has not resumed.  The elections in California and LA will take several weeks to determine who will be on the ballot in November, which, when you think about it, sums up the incompetence of California governance writ large.  

So, oil is higher along with the dollar and yields, but so are stocks, while metals slip.  Let’s look at the overnight activity.  Another set of equity records in the US was followed in Asia by broad based strength as Tokyo (+2.5%), China (+0.5%), Korea (+0.2%) and Taiwan (+2.0%) all continued to climb. Both HK (-1.6%) and India (-0.4%) were not as robust with the former seeing profit taking after a few strong sessions while the latter felt pressure from those rising oil prices.  One outlier here was Indonesia (-4.5%) which suffered after weaker than expected trade data, higher than expected inflation data, and a weakening rupiah which set another record low (dollar high), touching 18,000.

European bourses, meanwhile, are mostly under pressure after President Trump has devised a new way to impose tariffs on nations that allow “forced labor” which is defined as “all work or service which is exacted from any person under the menace of any penalty for its nonperformance and for which the worker does not offer himself voluntarily.”  One must give the president props for his continuous efforts to impose tariffs, if nothing else.  At any rate, Germany (-0.9%) is leading the way lower, followed by Italy (-0.3%), France (-0.2%) and the UK (-0.2%) although Spain (+0.5%) is bucking that trend on the strength of the earnings for Inditex (Zara clothing parent) which is one of the largest companies in the nation.  US futures, at this hour (6:40) are mixed.

In the bond market, yields are rising again on the back of the oil price rise with Treasury yields (+4bps) gaining alongside the entire European sovereign market, all of which have risen a similar amount.  Last night, JGB yields also rose 6bps, as they respond to the oil market as well as pending rate hikes by the BOJ.

In the commodity market, if you think back to late May, you may recall an announcement that a deal with Iran was close which prompted a gap lower in oil prices as you can see in the chart below.  Well, that gap has now been filled.

Source: tradingeconomics.com

Just as nature abhors a vacuum, markets abhor a gap and seek to fill it whenever possible.  My take here, though, is now that the gap is filled, there is less reason to see oil rally much further and a consolidation before a slow decline is in the cards.  As to metals markets, gold (-0.8%), silver (-1.2%) and copper (-1.1%) are all softer on the day, with their negative correlation to oil intact.

Finally, the dollar is firmer this morning, keeping in line with its recent relationship with other markets.  However, the movement remains relatively muted with most G10 currencies softer by -0.2% or so as only SEK (-0.6%) and NOK (+0.1%) really buck that trend.  NOK is clearly benefitting from the oil price rise while SEK seems to be suffering from a slightly higher beta to the broad dollar move.  In the EMG bloc, KRW (-0.9%) is the laggard as it continues under pressure and trading to its lowest levels (highest dollar) since 2009.

Source: tradingeconomics.com

But otherwise, most of these currencies are slipping a similar amount to the G10 bloc, on the order of -0.2% or so.

On the data front, this morning brings ISM Services (exp 53.8) as well as Factory Orders (4.6%, 0.8% ex-Transport) and then the EIA crude oil inventories with another sizable draw anticipated.  At 2:00, the Fed’s Beige Book is released which should make for some interesting reading.  Yesterday’s JOLTs data was surprising in that it showed a significant jump in job openings, 700K more than expected which does not portray a weakening labor market.

Overall, equity markets seem to be disconnected from the impact of oil prices, something that very few analysts would have forecast in February.  But the dollar remains closely linked to those prices for now.  As we all sit here, waiting for the next headline, I cannot help but look at the US data and consider that the economy continues to tick over pretty well.  Ultimately, I believe that bodes well for the dollar over time, or at least until some other major economy shows it can perform well.

Good luck

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