Tag Archives: stock-market

Trump’s Whirlwind

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Markets have embraced
Trump’s whirlwind. Thus, Ueda
Is free to hike rates

 

Tonight, the BOJ is apparently set to hike rates by 25bps.  The market probability is essentially 100% and the key clue is that the Nikkei news organization wrote an article about it that was published after the first day of the BOJ’s two-day meeting.  At the December BOJ meeting, Ueda-san explained that if inflation remained at or above their 2.0% target (it has) and if there were no major ructions in markets after President Trump’s inauguration (there haven’t been), then the BOJ was likely to continue to move their policy rate toward what they believe is a neutral stance.  Currently, that neutral stance is mooted at 1.00%, so a 25bp hike tonight takes the overnight rate to 0.50%, somewhat closer.

With all this widely anticipated and markets pricing in the result, the key question is how what Ueda-san will say during his press conference that follows the meeting.  There are many who are looking for a so-called ‘dovish’ hike, where there is no indication of the timing of any further rate hikes and a benign view of the future.  Certainly, a look at the FX market, where the yen (unchanged today, -0.8% in the past week) doesn’t indicate a great deal of fear over a much tighter policy.

Source: tradingeconomics.com

There has been a background narrative that explains the BOJ’s ongoing tightening is going to reach a point where Japanese investors are going to repatriate much of their overseas investment, driving a forceful upward move in the yen and having major negative impacts on risk assets around the world as liquidity retreats.  This is based on the idea that the Japanese are the largest exporters of capital in the world which is one of the key reasons equity markets are rallying everywhere, so if they bring that money home, that means they will sell their foreign equity holdings and buy yen.  While I believe this is a neatly wrapped idea, I would contend Japanese investment prospects are not yet near the same as in the US, so this idea may be premature.  In fact, a look at the chart below showing 10-year US Treasury and JGB yields overlaid with USDJPY indicates that the rate differential is nowhere near where it might need to be in order to encourage that type of behavior.  My take is absent some type of multilateral agreement to weaken the dollar, this will not happen organically.

Source: FRED database

In China, though communists rule
They favor the capital tool
Of equity bourses
And so, Xi endorses
A government stock buying pool

Elsewhere in the world, as we try to get outside the maelstrom that is Donald Trump, I couldn’t help but notice that, once again, Xi Jinping has called on his finance minions to do something, anything, to support the stock market.  And I cannot help but be struck by the irony of the Chinese Communist Party being so concerned about the situation in the most capitalistic institution of all.  The WSJ had an article discussing the latest measures that are on the board, including forcing encouraging insurance companies to increase the local equity portion of their portfolios and utilizing 30% of premium income to buy stocks.  This is on top of the PBOC reducing interest rates last year for companies that want to repurchase shares.

It continues to be very difficult for me to accept the idea that the Chinese are playing 4-D chess with long-term goals in mind while the US is playing checkers.  If that is the case, then the Chinese, or at least President Xi, is a really bad player.  His economy is under dramatic pressure because the property bubble he inflated has been shrinking for the past three years, undermining both the population’s wealth (property was their store of value) and confidence, while he ramps up more beggar thy neighbor trade policies at the same time the US has just elected a president whose middle name is Tariff.  Their population is shrinking because of the ‘foresight’ of their leadership to impose a one-child policy for two generations and while millions of people will risk their lives to immigrate to the US, people are looking to leave China.  Once again, I cannot look at this situation and conclude anything other than the CNY (-0.15%) is going to gradually decline all year long, and maybe not so gradually if pressure really builds.

Ok, let’s take a look at how markets are handling the latest set of Trumpian pronouncements and reactions by targets of his ire.  After yet another rally in the US, albeit on declining volumes so not as exciting as it might otherwise have been, Japanese shares rallied (+0.8%) as investors seem to believe that the interest rate hike tonight will be accompanied by a more dovish stance at the press conference.  Mainland Chinese shares (CSI 300 +0.2%) eked out a gain after the latest news discussed above, although Hong Kong shares (-0.4%) did not follow suit.  After all, the focus is on mainland shares.  The rest of the region was widely dispersed with gainers (Taiwan, Singapore, Philippines) and laggards (Korea, Australia, Thailand), many of these moves in excess of 1%.  It appears investors don’t know which way to turn yet given the speed of changes emanating from Washington.

In Europe, most bourses are modestly firmer (DAX +0.3%, CAC +0.5%) as we continue to hear more from ECB speakers that not only are rates going to be cut, but they are increasingly certain that they will achieve their inflation target.  Maybe they will.  As to US futures, at this hour (7:00) they are mixed to slightly softer with the NASDAQ (-0.4%) the laggard.

In the bond market, the decline in yields appears to be over, at least for now, as Treasuries (+3bps) continue to bounce from their recent lows at 4.54%.  As is almost always the case, this has carried European sovereign yields higher as well, by between 1bp and 3bps across the continent and UK and we saw JGB yields gain 1bp overnight.  I would contend there is still a great deal of uncertainty as to how the Trump administration is going to handle the conundrum of reducing inflation while expanding growth.  Outside of declining energy prices, which may be coming, it will be a tall task, and inquiring minds want to know.

Speaking of energy prices, oil (+0.35%) is edging higher after a lackluster session yesterday.  As with most markets, uncertainty is rife right now although this is clearly an area where Mr Trump is focused on expanding output.  NatGas (-0.3%) is a touch softer as forecasts for the end of the current Polar Vortex keep getting moved up. Metals markets are under some pressure this morning, with gold (-0.3%) backing away from that all-time high level and both silver and copper fading as well.  However, volumes remain light here implying not much interest overall.

Finally, the dollar is a touch stronger this morning, but there are few large movers in either the G10 or EMG blocs.  In fact, every G10 currency is within 0.2% of yesterday’s closing levels and none of them are at extremes.  The biggest loser today is ZAR (-0.6%) which seems to be responding to the precious metals complex backing off a bit overnight.  It remains very difficult to get a read on the dollar with all the other things ongoing.  As it happens, this is one market that has not received any Trumpian attention at all…yet.

We finally have a smattering of data this morning with the weekly Initial (exp 220K) and Continuing (1860K) Claims to be followed by the EIA’s oil inventory data where it appears a modest net build across products is forecast.  With the Fed quiet, and very little focus on Powell and company right now, today looks to be shaping up as another equity focused day with the dollar likely taking its cues there.  While we never know what will hit the tape these days, absent a new surprise vector, there is no reason to look for significant movement today at all.

Good luck

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Trump 2.0

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Today begins Trump 2.0
And pundits are trying to show
Their ideas are sound
As how he’ll redound
On policies he will bestow
 
But this poet can’t comprehend
How anyone thinks what they’ve penned
Is likely to be,
To any degree,
Correct. ‘Stead, let’s look at the trend

 

As Donald Trump prepares to take the oath of office today, there has been a non-stop barrage of pundits putting forth their views as to how policy proposals that were made during the campaign, and even since the election, are going to impact the economy as well as equity, bond and FX markets.  But I would take exception to all these as, if we learned nothing else from Trump’s first term in office, we have no idea how he may try to do the things he says he is going to do.  Are tariffs a funding process?  Are they negotiating tactics?  Are they punishment?  Since we have no idea at this point (all three of those ideas have been floated by “insiders” and pundits), how can we meaningfully forecast the impact tariffs may have going forward?  So, I won’t even try.

Rather, I think there is much to be learned from looking at the long-term trends in markets and perhaps trying to come up with reasons that these trends may be changing, or not, going forward.  As such, take a look at the charts below, all from tradingeconomics.com, where I have tried to highlight the long-term trend in the dollar (EURUSD), the S&P 500, 10-Year Treasury Notes, oil and gold.

My first observation is that over the past twenty-five years, oil has traded both higher and lower with no discernible direction.  Certainly, we are higher now than 25 years ago, but we have been both much higher and lower in the interim.  Now, if Trump is successful at freeing up more drilling opportunities, removing the offshore drilling ban that Biden imposed last week, and reducing the regulatory structure such that the cost of drilling declines, my take is increased supply will result in some downward pressure.  As well, if he is successful at bringing an end to the Ukraine war, it seems probable that Russian oil may no longer be sanctioned, and that, too, would pressure prices lower.  But will he impose tariffs on Canada, a key source of sour crude used to refine diesel?  That could easily pressure prices higher.  And what of Venezuela?  As I said, no way to know.  In the end, my take is that the most likely outcome is that oil will continue to demonstrate its inherent price volatility given its price inelasticity.  I think you can equally make the case for $50 oil as well as $100 oil based on many idiosyncratic issues that have nothing to do with Trump.

The only noteworthy change we have seen is in 10-Year Treasury yields, which after a 40-year downtrend following the back-to-back recessions in 1980-1982 and Fed Chair Volcker’s policy tightening, look very clearly to have reversed course.  I am not the first to notice this but believe that it is an important feature of markets going forward.  There are virtually two generations of traders and investors who have only ever seen interest rates decline and have created their mental investment models on that underlying thesis.  If the future is going to bring about higher interest rates over time (and given my view that inflation is not going to disappear and that will be a key driving force), then investment models in a higher inflation, higher yield environment are going to be different than what we have seen up through 2022.  

One of the keys is that the idea behind the 60/40 portfolio, where declines in stock prices were offset by rises in bond prices, turns out to only really be true in a low inflation environment, sub 2.5%.  If inflation is going to run at 3.5% – 4.5% going forward, then all the strategies that incorporated that 60/40 basis are going to have an awfully difficult time, again, regardless of what Trump does.  The one caveat here is if he is successful in driving inflation back to that <2.0% level, but that seems highly unlikely in the near term given how sticky inflation has proven to be even without any new policies.

Now, if we look at the dollar, that trend has been very consistent and remains in place with the dollar seemingly set to continue to appreciate.  Given Trump’s stated desire to reshore American manufacturing and reduce the trade deficit, he almost certainly would like to see the dollar decline.  However, at this point, it’s not clear what policies are going to drive that.  Historically, loose monetary and tight fiscal policy will weaken a currency, and that could well be what we see, except that is likely to create a burst of inflation before the tight fiscal policy reins that in.  And you know as well as I that Trump will be very displeased with that outcome.

It is certainly possible that the Treasury could intervene to weaken the dollar, but that is also something that is exceedingly rare in this country.  Perhaps the most likely situation here would be a Mar-a Lago (?) Accord, or something like that akin to the Plaza Accord of 1985, where the G7 at the time all agreed that the dollar needed to decline.  Now, on the one hand, given the weakness in the other G10 economies currently when compared to the US, my take is those nations are pretty happy to have weak currencies to help support their domestic industries.  On the other hand, I suspect the EMG bloc who have funded themselves in USD are really interested in seeing a weaker dollar to help them get easier access to dollars to service and repay their debt.  My take is that until there is a definitive policy pronouncement, and this will require something like that as quiet policy adjustments are likely to be missed by the FX market, this trend will remain intact.

Finally, a look at both equities and gold shows basically the same chart, with both showing accelerating price increases and both now significantly above their long-term trend lines.  The question, of course, is can this continue?  Keynes was reputed to have told us that markets can remain irrational longer than you can remain solvent, implying just because market pricing doesn’t make fundamental sense doesn’t mean it cannot continue further.  But in the end, trees don’t grow to the sky, and corrections in these markets seem somewhat overdue.  Consider the S&P 500 chart, where we see the sharp decline in 2022.  Many remember that as the worst market since the GFC crash, and yet on the chart, it looks like a modest correction.  Consider also, that if the market were to decline to the trend line I have drawn, it would be nearly a 50% correction, and that just puts it back on trend!  Again, volatility seems the watchword going forward, but until we see something that is going to change opinions, the trend in both stocks and gold seems higher.

OK, as we await the official change in presidency here, let’s review the overnight price action, which was generally positive following Friday’s US equity rally.  Remember, too, it is MLK Day, and markets are closed in the US.

Asian markets saw broad gains with the Nikkei (+1.2%) and Hang Seng (+1.75%) leading the way while mainland shares (+0.45%) lagged but were still in the green.  Away from the major markets, there were far more gainers than laggards, but the biggest moves were on the order of 0.4%, nothing of real note.  Positive Japanese data was the driver in Tokyo (Machinery Orders +3.4%) while HK and Chinese shares benefitted from the news that Presidents Trump and Xi spoke, hopefully in a prelude to less tension.  In Europe, markets are essentially unchanged across the board this morning as it seems investors cannot discern whether Mr Trump will be beneficial for the continent or not.  Certainly, I continue to read about a number of European leaders who are unhappy at the prospects of a Trump presidency (specifically PM Starmer who has ostensibly said the US-UK relationship is destined to diminish).  While that may be true, my take is it will not help the UK very much.  And, while US markets are closed today, US futures are pointing modestly higher this morning.

In the bond market, yields are edging higher in Europe, up between 1bp and 2bps on the continent while UK Gilt yields are higher by 3bps.  Overnight saw JGB yields slip 1bp and, of course, with banks closed in the US, Treasury yields are unchanged in the cash market.  However, bond futures are pointing to a 1bp rise as well.

In the commodity markets, oil is little changed on the day while NatGas (-4.4% after a -6.0% decline on Friday) is falling on news that weather models, which had been calling for another cold spell in February, have changed and are now saying temperatures will be milder then.  In the metals markets, gold (+0.3%) is edging higher while both silver (-0.3%) and copper (-0.4%) are slipping a touch, but given their inherent volatility, arguably these are unchanged on the day.

Finally, the dollar is under some pressure this morning with then euro (+0.5%) leading the G10 higher although similar sized gains are seen across the board with only JPY (0.0%) failing to go along for the ride.  EMG currencies are also picking up led by HUF (+2.0%) as it seems there is excitement in Hungary regarding the inauguration as PM Orban seems to share many of President Trump’s views on various geopolitical issues.  But CZK (+0.9%) and PLN (+0.6%) are also rallying alongside KRW (+0.5%), although MXN (-0.3%) seems to be showing concerns regarding how that relationship will evolve.  Certainly, as I mentioned above, President Trump will not be unhappy to see the dollar slide a little, but I don’t see this as the beginning of a new trend.

With no data today, and a light week in general, and given how long this missive has already become, I will lay out the data releases tomorrow.  Today, all eyes will be on the ~200 Executive Orders President Trump will sign and I expect it will take a little time to digest it all, so we will see how things really begin tomorrow.

Good luck

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Falling Further

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Like a stone toward earth
The yen keeps falling further
Beware Kato-san

 

While we have not discussed the yen much lately, its recent weakness, in concert with the dollar’s broad strength, has begun to cause some discomfort in Japan.  Last night, Japanese FinMin Katsunobu Kato explained, “We will take appropriate action if there are excessive movements in the currency market.”  He went on that he is “deeply concerned” by the recent weakness, especially moves driven by those evil pesky speculators.

The problem, of course, is that all those expectations that the BOJ would be tightening policy to fight domestic inflation while the Fed would continue to ease policy since they “beat” inflation, with the result being the yen would regain its footing, have proven to be false hope.  Instead, as you can see from the below chart, since the Fed first cut rates back in September, the yen has tumbled nearly 13% and very much looks like it is going to test the previous four-decade highs seen last summer.

Source: tradingeconomics.com

Last year, the MOF/BOJ spent about $100 billion in their efforts to stem the yen’s weakness.  They still have ample FX reserves to continue with that process, but ultimately, history has shown that maintaining a cap on a currency that is weakening for fundamental reasons is nigh on impossible.  If a weak yen is truly seen as existential in Tokyo, then Ueda-san needs to be far more aggressive in tightening monetary policy.  This is especially so given the Fed continues to back away from earlier expectations that it would be aggressively loosening policy.  Now, while JGB yields have moved higher over the past several sessions, trading now at 1.18%, which is their highest level since April 2011, that is not going to be enough to stem this tide.  From what I read, inflation is an issue, but not the same as it was in the US in 2022, so Ueda-san is not getting the same pressure to address it as Powell did back then.  My read is the BOJ remains on hold this month and hikes rates in March while the yen continues its decline.  Look for another bout of intervention when we test the 162 level, but that will not stop the rot.  Nothing has changed my view of 170 or higher in USDJPY by year end.

Though Treasury yields have been rising
Most credit spreads have been downsizing
So, corporate supply
Is ever so high
An outcome that’s somewhat surprising

In the bond market, government bond yields continue to rise around the world (China excepted) as investors increase their demands in order to hold the never-ending supply of new bonds.  Ironically, despite this ongoing rout in government bonds across the board, corporate debt issuance looks as though it will set new records this month.  One thing to remember here is that corporates have a lot of debt coming due over the next two years as all that issuance during the ZIRP period needs to be rolled over.  But the other thing to recognize is that corporate credit spreads, the amount of yield investors require to own risky corporate bonds vis-à-vis “safe” government bonds, has fallen to its lowest levels in years, and as can be seen in the chart below, the extra yield available for high-yield investors is shrinking faster than for investment grades.

Potentially, one reason for this is the dramatic increase in the amount of Private Credit, the latest investment fad where weaker credits go directly to funds designed to lend money rather than to their banks, and investors ostensibly remove one of the middlemen from the process.  As such, there is less of this debt around than there otherwise might be, hence increasing demand and reducing that credit spread.  But the other reason is that there continues to be a significant amount of investable assets looking for a home, and with global yields near the highest they have been in a decade or more, and with the equity market dividend yield down to just 1.27% or so, a record low, there are lots of investors who are comfortable with clipping 5% or 5.5% coupons on BBB corporate bonds.

The question I would ask is, if government bond yields continue to climb, and I see no reason for that to stop given the trend in inflation and necessary issuance, at what point are investors going to get scared?  We are likely still a long way from that point, but beware if the new Treasury Secretary, Scott Bessent, follows through with his hinted views of reducing T-bill issuance and increasing coupon issuance, yields could go much higher absent the Fed implementing QE.  That would cause some serious market ructions!

Ok, let’s see how things look around markets this morning after yesterday’s sell-off in the US equity markets.  It seems Japanese stocks were caught between the weaker yen (generally a stock positive) and the tech sell-off (generally a stock negative) with the Nikkei closing lower by -0.25% on the session.  Meanwhile, the Hang Seng (-0.9%) suffered a bit more on the tech move, although Mainland shares (-0.2%) were not as badly affected.  An interesting story here is that the chief economist at state-owned SDIC Securities made comments at an international forum run by the Peterson Institute that really pissed off President Xi.  Gao Shanwen said the quiet part out loud when he claimed that actual GDP growth in China for the past several years has likely been much closer to 2% than the 5% published.  That story has been widespread in the West, although has never been given official credence.  And for Xi, 2% growth is not going to get it done, what with the property bubble still imploding and consumption declining despite promises of more stimulus.  Stay tuned to this story to see if we start to see more Western analysts reduce their expectations.  Elsewhere in Asia, the picture was mixed with gainers (Korea, Australia, Singapore) and laggards (Taiwan, Malaysia, Philippines).

In Europe, red is today’s color, led by the CAC (-1.0%) although we are seeing losses across the board. Eurozone data showed declining Consumer Confidence, Economic Sentiment and Industrial Sentiment all while inflation expectations remain stubbornly high.  That stagflationary hint is typically not an equity market benefit so these declines should be expected.  The story on the continent is not a positive one and I maintain that the ECB is going to have to cut rates more aggressively than their inflation mandate would suggest.  That might support equities a bit, but it will be hell on the euro!  Finally, US futures are a touch softer (-0.2%) at this hour (7:05) although they were higher most of the overnight session before this.

As mentioned above, bond yields are higher with Gilts (+9bps) leading the way as not only is the economy suffering from some very poor policy decisions by the Starmer government, but it seems that the ongoing political crisis regarding grooming gangs has investors shying away.  But yields continue to rise across the board with continental yields up between 3bps and 6bps, Treasury yields higher by another 1bp this morning after a 10bp rise in the previous two sessions, and JGB yields, as mentioned, higher by 5bps.  This trend is very clear!

In the commodity markets, oil (+0.5%) keeps on keeping on, as API data showed a greater than 4mm barrel draw on inventories, far more than expected and indicating a reduced supply around.  Cold temperatures are keeping NatGas (+5.0%) firm as well.  In the metals markets, both precious and base are under a touch of pressure this morning, down less than -0.2%, largely in response to the dollar’s rebound.

Speaking of the dollar, it is higher against all its counterparts this morning with the pound (-1.2%) the G10 laggard although weakness on the order of 0.5% is pretty common this morning.  In the EMG bloc, ZAR (-1.5%) is the worst performer, after weaker than expected PMI data called into question the economic path forward.  But here, too, we are seeing weakness like MXN (-0.9%), CLP (-0.8%), PLN (-0.8%) and KRW (-0.5%).  I would be remiss to ignore CNY (-0.25%), which is trading below (dollar above) 7.3600 in the offshore market, and is now 2.4% weaker than last night’s fixing rate.  This is also the weakest the renminbi has been since it touched this level back in September and then November 2007 prior to that.  Those Chinese problems are coming home to roost for President Xi.

On the data front, ADP Employment (exp 140K) leads the day followed by Initial (218K) and Continuing (1870K) Claims.  These are being released this morning because of tomorrow’s quasi holiday regarding the late President Carter, when US markets will be closed.  This afternoon, the FOMC Minutes arrive and will be scrutinized closely to see just how hawkish they have become.  We also hear from Governor Waller this morning with caution being the watchword from virtually every Fed speaker of late.

It is all playing out like I anticipated, with the ISM data showing strength yesterday, not just in the headline number, but also in the Prices Paid number.  The Fed will have no chance to cut rates again, and I look for the dollar to continue to rise.

Good luck

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Active De-Bonding

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Up north is a nation quite vast
Whose money, of late’s been, out, cast
But word that Trudeau
Is soon set to go
Has seen Loonies quickly amassed
 

One of the biggest stories over the weekend has been the sudden upsurge in articles and discussion regarding the remaining tenure for Canadian PM Justin Trudeau.  For the past several weeks, since his FinMin Krystia Freeland resigned and published a scathing resignation letter, pressure on Trudeau has increased dramatically.  It appears that it is coming to a head with articles from both Canadian and international sources indicating he may step down as soon as this week.  As well, his main political rival, conservative party leader Pierre Poilievre, is touted, according to the betting websites, as an 89% probability to be the next PM.
 
Now, we all know the dollar has been strong in its own right lately, and I suspect that while there will be bumps along the road, it will get stronger still over the year absent some major Fed rate cutting.  As such, USDCAD is higher along with everything else.  However, you can see in the chart below (the green line rising faster than the blue line since December) that it has been an underperformer for the past month, since that Freeland resignation, as investors have been shying away from Canada, given the combination of concerns over the incoming Trump administration imposing tariffs and no political leadership to address these issues.

 

Source: tradingeconomics.com

While no sitting politician is ever willing to cede power easily, and there are indications that Trudeau is going to go down kicking and screaming, ultimately, I expect that Poilievre will be the PM and will develop a strong relationship with the US.  As that becomes clearer, I expect to see the CAD appreciate modestly vs. the dollar, but much more so against other G10 currencies.

Once more, what the Chinese have said
Is stimulus is straight ahead
But so far, its talk
They ain’t walked the walk
So, bulls need take care where they tread

Another tidbit this morning comes from Beijing, where the economic planning agency there has indicated that they will expand subsidies for consumer purchases of electronic goods like cellphones, tablets and smart watches, as President Xi continues to watch his nation’s economy grind along far more slowly than he really needs to happen.  There was an excellent thread on X this morning by Michael Pettis, one of the best China analysts around, describing the fundamental problem that Xi has and why the slow motion collapse of the property market portends weakness for a long time going forward.  As is almost always the case, while tearing the proverbial band aid off quickly can hurt more at the instant, the pain dissipates more quickly.  President Xi believes he cannot afford to inflict that much pain, so their problems, which stem from decades of malinvestment in property that inflated a massive bubble, are going to last for a long time.  While CNY (+0.4%) is modestly firmer this morning, that is only because the dollar is weaker across the board, and in fact, it is significantly underperforming.

This week, the US Treasury’s Yellen
Much debt, will look forward to sellin’
The market’s responding
By active “de-bonding”
With dollars and bonds both rebellin’

The last big story of the day is clearly the upcoming Treasury auctions this week, where the US is set to sell $119 billion of debt, starting with $58 billions of 3-year notes today.  Arguably, market participants have been aware that this was going to be a necessary outcome given the massive deficits that continue to be run by the US.  Adding to the broad concept of deficits, the Biden administration appears to be trying to spend every appropriated dollar in the last two weeks in office and that requires actual cash, hence the auctions to raise that cash.  In addition, the debt ceiling comes back into force shortly, so they want to get this done before that serves to prevent further issuance.

Now, the yield curve has reverted back to a normal slope with the 2yr-10-yr spread at 34bps and 30yr bonds trading another 22bps higher than 10yr at 4.81% and bringing 5% into view.  Here’s the thing about the relationship between the dollar and yields; the dollar is typically far more correlated to short-term yield differentials, not long-term yields.  So rising 30yr bond yields is not likely to be a dollar benefit.  In fact, just the opposite as international investors will not want to suffer the pain of those bonds declining in price rapidly.  

And this is what we are witnessing this morning as the dollar, which rallied sharply at the end of last week, is correcting in a hurry today.  As mentioned above, CNY is the laggard with the euro, pound, Aussie, Kiwi and Loonie all firmer by 1% or more this morning and similar gains seen across the emerging markets, with some extending those gains as far as 1.35% or so.  Is this the end of the dollar?  I would argue absolutely not.  However, that doesn’t mean that we won’t see a further decline in the buck before it heads higher again.  A quick look at the chart below, which shows the Dollar Index, while it has just touched the steep trend line higher, it remains far above its 50-day and 100-day moving averages.  Howe er, it seems that the big story here comes from a report from the Washington Post that Trump is considering much less widespread tariff impositions with only some critical imports to be addressed.  As such, given the tariffs = higher dollar consensus, if this is true, you can understand the dollar’s retreat.

Source: tradingeconomics.com

However, today’s story is that of a weak dollar and strong equity markets, well at least in some places. Friday’s US equity rally was not followed by similar enthusiasm in Asia with the Nikkei (-1.5%) leading the way lower while both the Hang Seng (-0.4%) and China (-0.2%) also lagged.  Perhaps the mooted China stimulus helped those markets on a relative basis.  Europe, however, is in fine fettle (CAC +2.3%, DAX +1.4%, IBEX +0.9%) as PMI data released this morning was solid, if not spectacular, and the weaker dollar seems to be having a net positive impact.  US futures are also firmer, with NASDAQ (+1.1%) leading the way.

In the bond market, the big movement was in Asia overnight as JGBs (+4bps) sold off alongside virtually every other Asian bond market except China, which saw yields edge lower by 1bp to a new record low of 1.59%.  In Europe, there has been very little movement with yields +/- 1bp at most and Treasury yields, which had been firmer earlier in the overnight session, have actually slipped back at this hour and are lower by 2bps to 4.58%.

In the commodity markets, the weak dollar has helped support prices here with oil (+1.0%) continuing its rally (+9% in the past month) as the combination of Chinese stimulus hopes and cold weather seem to be providing support.  Speaking of cold weather, NatGas (+7.4%) is also in demand this morning as winter storm Barrie makes its way across the country.  In the metals markets, gold (+0.3%) is the laggard this morning with both silver (+2.3%) and copper (+2.4%) really taking advantage of the dollar’s weakness.

On the data front, there is a ton of stuff this week, culminating in NFP on Friday.

TodayPMI Services58.5
 PMI composite56.6
 Factory Orders-0.3%
TuesdayTrade Balance-$78.0B
 ISM Services53.0
 JOLTS Job Openings7.70M
WednesdayADP Employment139K
 Initial Claims217K
 Continuing Claims1848K
 Consumer Credit$12.0B
 FOMC Minutes 
FridayNonfarm Payrolls160K
 Private Payrolls134K
 Manufacturing Payrolls10K
 Unemployment Rate4.2%
 Average Hourly Earnings0.3% (4.0% Y/Y0
 Average Weekly Hours34.3
 Participation Rate62.8%
 Michigan Sentiment73.9

Source: tradingeconomics.com

In addition to all this, we hear from six more Fed speakers over seven venues with Governor Waller likely the most impactful.  Over the weekend, we heard from Governor Kugler and SF President Daly, both explaining that they needed to see more progress on inflation before becoming comfortable that things were ok.

Clearly, the tariff story is the current market driver in the dollar.  As I never saw tariffs as the medium-term driver of dollar strength, I don’t think it has as much importance.  Plus, this is a report from the Washington Post.  There are still two weeks before inauguration and many things can happen between now and then.  Nothing has changed my longer-term view that the dollar will be supported as the Fed, which is not tipped to cut rates this month and is seen only to be cutting about 40bps all year will ultimately raise rates as inflation proves far more stubborn than desired.  But that is the future.  Today, pick spots to establish dollar buys and leave orders.

Good luck

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Boom and Bust

Posted on by

According to people we “trust”
The past which involved boom and bust
Will stay in the past
And now, at long last
The owning of stocks is a must
 
So, whether today’s NFP
Is weak or strong, what we foresee
Can best be expressed
By buying the best
That BlackRock will sell for a fee

 

Is it different this time?  Have stocks reached a “permanently high plateau”?  Has the global economy exited the cycle of ‘boom and bust’ which has existed since the beginning?  These questions are relevant today after the release of BlackRock’s 2025 Global Outlook which explained that “Historical trends are being permanently broken in real time as mega forces, like the rise of artificial intelligence (AI), transform economies.”

BlackRock’s claim is simply the latest by a well-known investor that stock prices will never retreat again, and the future is unbelievably bright.  “This time is different” has been said about virtually every bull market top, whether the real estate bubble, the tech bubble, the Japanese bubble, the Chinese real estate bubble or even the South Seas bubble hundreds of years ago.  In fact, in order to inflate a bubble, the narrative must be, this time is different.

That permanently high plateau comment came from Irving Fisher, who while a very well-respected economist for his work on debt deflation (which came after the Depression started), famously made that comment on October 21, 1929, just days before the crash that led to the Great Depression.

So, the question is, has BlackRock defined the top in equity markets this time?  I think it is worthwhile to take a longer-term perspective on market performance to try to answer that question, and more importantly, figure out what to do if this is the top.  A look at the chart below, the last 50 years of the S&P 500, shows that every one of the major downturns we have seen, at least in my lifetime, has been nothing more than a blip.

Source: tradingeconmics.com

For instance, the tech bubble was an anthill around 2000 on this chart, and the GFC crash, while described as the worst recession since the Great Depression, seems to be a pretty modest dip.  Covid in 2020 was almost nothing and the biggest was really 2022, which saw the index slide 25% through the first 9 months of the year.  Of course, part of this is the number itself.  A 25% decline now would be ~1500 S&P points (or 11,000 Dow points), the type of thing that would freak out nearly everybody.  

Is this possible?  Certainly, it is, 25% declines have occurred pretty regularly through the history of the market.  Is it likely?  This is a much tougher question.  BlackRock’s thesis is that this time is different; that AI is the game changer, and the future will be finally filled with flying cars and robots doing all our chores on the basis of unlimited free energy for everyone.  Ok, that may be a slight exaggeration, but they are extremely optimistic that technology will continue to move forward and solve what currently appear to be intractable problems.

The one thing working in their favor, I think, is that governments and central banks around the world have essentially lost their tolerance for market corrections, whether that is in equity or fixed income markets, and so will do whatever they can to prevent any small slide from becoming a large one.  Of course, the only thing they can do is print money to buy those assets that are falling in price.  If that is the plan of action, then the future will be highly inflationary, that is the only clear outcome.

I have no idea how things will turn out.  Perhaps BlackRock is correct, and we are about to embark on an entirely new segment of economic and financial history.  Perhaps Elon will successfully help restructure the US government so it is efficient and focused on a more limited role, and that process will inspire other nations to follow suit.  Perhaps pigs can fly as well.  I hate to be a curmudgeon, but trees still don’t grow to the sky, whether they are created by AI or nature.  Gravity remains undefeated.  But I am wary when I read reports claiming this time is different.  Forty plus years in the markets has taught me that is never the case.  Tools may change, timelines may change, but ultimate outcomes remain the same.

Ok, as we await this morning’s NFP report, let’s see what happened overnight.  Yesterday’s very modest declines in the US equity markets were followed by a slide in Japan (Nikkei -0.8%) and one in Australia (-0.6%) although this was predicated on weaker than expected GDP data, while Chinese shares (Hang Seng +1.6%, CSI 300 +1.3%) rallied on hopes that the economic conference next week is going to finally fire that long awaited Chinese bazooka!  In Europe, the most interesting aspect is the CAC (+1.4%) is having a wonderful day after the French government fell and prospects for managing the economy there remain extremely uncertain.  Perhaps that represents the idea that if the government is not interfering, French corporates can get on with the business of business unhindered and make more money.  Or perhaps it is an assumption that the ECB will ease more forcefully to prevent a major mishap.  After all, Madame Lagarde is French, so is likely not unbiased in the matter.  As to US futures, at this hour (7:15) they are lower by -0.1% across the board as we await the data.

In the bond market, there is nothing going on at all. Treasury yields are unchanged on the day which is true of virtually every European sovereign with one exception, French OATs which have seen more buying and have slipped 2bps lower in the session.  Here, too, it almost seems as though the market has decided the lack of a working government is better for France’s finances than when there is someone in power.  One other thing to note is that JGB yields have edged lower by 1bp this morning and have fallen 4bps this week as USDJPY has traded higher over the same period.  The most noteworthy thing here is that Toyoaki Nakamura, one of the most dovish BOJ members, explained that he was not against hiking rates, per se, and market participants took that as an opening for the BOJ to do just that and perhaps take a more pronounced stance against the ongoing inflation there.  I’ll believe it when I see it.

In the commodity markets, apparently nobody needs oil (-0.8%) anymore as it continues to sell off.  Remember just a few days ago we breached $70/bbl on the upside.  Well, this morning we are below $68/bbl amid fears(?) that peace is breaking out in the Middle East with talk that Hamas is willing to release the hostages to achieve a cease fire.  Arguably, a bigger issue is that much of the world (mostly China and Europe) have seen slowing economic activity and so demand estimates continue to decline along with the price.  As to the metals markets, they have been bouncing around lately, not making any headway in either direction as it appears traders are waiting for more concrete clues about demand here as well.  Gold (+0.2%) is the exception here, with demand not in question, just the timing of the next wave of central bank purchases.

Finally, the dollar is somewhat stronger overall this morning, notably vs. both AUD (-0.5%) and NZD (-0.4%) on the back of that weak GDP data.  Away from that, the rest of the G10 is mostly a bit softer, but not seeing large moves with NOK (-0.4%) excepted on the weak oil prices.  In the EMG bloc, declines are pretty consistent around the -0.2% range, but nothing really of note.

Now to the NFP data.  Here’s what is forecast:

Nonfarm Payrolls200K
Private Payrolls200K
Manufacturing Payrolls28K
Unemployment Rate4.2%
Average Hourly Earnings0.3% (3.9% y/Y)
Average Weekly Hours34.3
Participation Rate62.6%
Michigan Sentiment73.0

Source: tradingeconomics.com

In addition, we hear from four more Fed speakers (Bowman, Goolsbee, Hammack and Daly) so it will be interesting to see how they perceive the amount of caution that is appropriate going forward.  As a marker, this morning the Fed funds futures market is pricing a 70% probability of a December rate cut, down 4 points.

The big picture remains that the economy continues to outperform the naysayers, at least according to the official data.  The fact that performance is spread unevenly does not matter to markets at this time.  As such, it remains difficult for me to create the scenario where the dollar gives up substantial ground.  If the Fed does cut in two weeks, I think it will be the last for a while unless we start to see some major revisions lower in the data.  Maybe that starts this morning, but until then, you have to like the buck.

Good luck and good weekend

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Three-Three-Three

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Apparently, everyone’s sure
Scott Bessent is wholesome and pure
As well, he will fix
The Treasury’s mix
Of policies for more allure
 
He’s focused on three, three and three
His shorthand for what we will see
The budget he’ll cut
Build up an oil glut
And push up the real GDP

 

President-elect Trump has named hedge fund manager Scott Bessent to be Treasury Secretary.  This appears to be one of his less controversial selections and has been widely approved by both the punditry and the markets, at least as evidenced by the fact that equity futures are rallying while Treasury yields are sliding.  An article in the WSJ this morning lays out his stated priorities which can be abbreviated as 3-3-3.  The 3’s represent the following:

  • Reduce the budget deficit to 3%
  • Pump an additional 3 million barrels/day of oil
  • Grow GDP at 3% on a real basis

The target is to have these three processes in place by the end of Trump’s term in 2028.  I certainly hope he is successful!  However, while 3-3-3 is a catchy way to define things, it is a heavy lift to achieve these goals.  In the article, he also explains that he will be seeking to make permanent the original Trump tax cuts from 2017 as well as uphold Trump’s promises of no tax on tips, overtime or Social Security.  

Now, the naysayers will claim this is impossible, especially the idea of cutting taxes and reducing the budget deficit, but then, naysayers make their living by saying such things.  While nothing about this will be easy, the one overriding rule, I believe, is that increasing the pace of real GDP growth is the only way to achieve any long-term sustainability.  It is in this space where I believe the synergies between Treasury and the newly created DOGE of Musk and Ramaswamy will be most critical.  Improved government efficiency (I know, that is truly an oxymoron) and reduced regulatory red tape will be what allows the real economy to perform above its currently believed potential growth rate.  And in truth, if Trump and his government are successful at that, the chances of overall success are quite high.  Yes, that’s a big ‘if’ but it’s all we’ve got right now.

And truthfully, this has been the only story of note overnight as the punditry churns out stories about what can be good or why he will fail.  While there was a note that a ceasefire in Lebanon may be close, I don’t believe that has been a major part of the market narrative regarding oil prices for a while.  After all, Lebanon doesn’t have any oil infrastructure and while Iran clearly funds Hezbollah, it doesn’t appear they have been willing to lay it all on the line for Hezbollah’s success.

So, market participants are very busy trying to determine the best investments in the new Trump administration and based on all we have seen so far, it appears that Bitcoin is at the top of the list followed by equities, especially value and small-cap and then the rest of the equity universe.  US markets remain more attractive than foreign markets while commodities, especially haven assets like precious metals, have lost their allure in this shiny new world.  At this point, the big Investment banks are busy increasing their equity market targets for 2025 and beyond with S&P 500 forecasts of 6700 and more already being put in place.

Oh yeah, one other thing is the dollar, which had been on a tear for the past two months, has at the very least paused and some are calling that it has topped.  While it is certainly softer this morning, calling a top may be a bit premature.  At any rate, let’s see how markets around the world have behaved in the wake of the newest US news.

Some are saying that Friday’s US equity rally was in anticipation of the Bessent pick, and certainly his name was on the short-list, but that’s a tough case to make in my eyes.  Nonetheless, rally it did and that was followed by strength in Japan (+1.3%) overnight as well as most of Asia (Korea +1.4%, India +1.25%, Australia +0.3%) although both China (-0.5%) and Hong Kong (-0.4%) lost ground as Bessent is very clear that tariffs are an important part of his strategy.  Meanwhile, in Europe, there are modest gains (DAX +0.1%, FTSE 100 +0.2%, IBEX +0.6%) although the DAX (-0.1%) is softer after weaker than forecast IFO data.  Europe remains stuck in a difficult situation as their energy policy is hamstringing the economy while services inflation remains stickier than they would like to see, thus potentially hindering more aggressive ECB policy.  In the end, though, prospects on the continent are just not as bright as in the US right now.  US futures are quite happy with the Bessent choice, rising 0.5% at this hour (7:30).

In the bond market, investors are also of the belief that Bessent will be able to solve some of the US’s problems and Treasury yields have slipped -4bps this morning, although remain near 4.40%.  However, European sovereign yields are all creeping higher, between 1bp and 3bps, as the prospects there seem less positive.  I would say that investors are willing to give Bessent a chance to try to improve the US fiscal situation and that should help encourage bond buying.

Commodity markets, though, are under pressure generally, although not completely. For instance, oil prices fell $1/bbl upon the Bessent news but have since regained the bulk of that as it appears the growth story is starting to take over.  Nat Gas (+4.8%) is continuing to rally strongly, especially in Europe as cold weather forces rapid inventory drawdowns and supplies remain a political, not market question.  Interestingly, upon inauguration, one of the first things Trump has promised is to take the pause off the LNG terminals which should raise demand in the US as exports increase and potentially reduce prices in Europe.  

However, as mentioned above, precious metals are under pressure (Au -1.2%, Ag -1.9%) as investors believe that a combination of less warmongering and an attack on the fiscal deficit will both reduce the need for a safe haven.  As well, given Trump’s well-known disdain for the climate change hysteria, it seems likely support for wind and solar will be reduced, if not eliminated, and silver is a critical need for solar panels.  

Finally, the dollar is under pressure this morning, lower versus almost all its counterparts, notably the euro (+0.6%), although also seeing losses (currency gains) against the entire G10, more on the order of 0.25% or so.  In the EMG bloc, CLP (+0.9%) is the leader as copper (+0.6%) is the outlier in the metals group gaining on the positive economic story.  But we are seeing strength in MXN (+0.45%), PLN (+0.8%) and CNY (+0.15%) as long dollar positions are reduced.  

On the data front this week, with the Thanksgiving holiday on Thursday, everything is crammed into the beginning of the week as follows:

TodayChicago Fed National Activity-0.15
TuesdayCase-Shiller Home Prices4.9%
 Consumer Confidence111.6
 New Home Sales730K
 FOMC Minutes 
WednesdayPCE0.2% (2.3% Y/Y)
 Core PCE0.3% (2.8% Y/Y)
 GDP2.8%
 Personal Income0.3%
 Personal Spending0.3%
 Durable Goods0.5%
 -ex transports0.2%
 Initial Claims217K
 Continuing Claims1910K
 Real Consumer Spending3.7%
 Chicago PMI44.7

 Source: tradingeconomics.com

Mercifully, the Fed seems to be taking the week off with no scheduled speakers although I suppose if something surprising happens, we will likely hear from someone.  

I guess the question is, does Scott Bessent really change everything by that much?  Obviously, we have no way of knowing until he is in the chair, and that is probably two months away at minimum and then it will take some months before anything of substance actually happens.

But, when I consider my long-term thesis which was that inflation is going to be with us for a while which will result in a steeper yield curve, especially if the Fed continues to cut rates, that would have helped both the dollar and gold while hurting both equities and bonds.  This morning, though, the probability of a December rate cut has fallen to 52%, and I imagine it will continue to decline, especially if the PCE data remains hotter than the Fed keeps expecting.  As well, questions about the Fed’s political bias will be raised again as the rationale for cutting rates 75bps given the headline data remained strong has always been unclear.  So, if the Fed is done cutting, that means the dollar is far more likely to rally from here than fall further, commodity prices will struggle (except maybe NatGas) and bond markets may not anticipate nearly as much future inflation with a tighter Fed and a new administration focused on more fiscal rectitude.  In that situation, equities certainly hold much more appeal, although pricing remains steep no matter how you slice it.

Good luck

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Half-Crazed

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The rest of the world is amazed
And frankly, I think, somewhat dazed
The vote in the States
Deteriorates
Each cycle, as folks turn half-crazed
 
But still, everyone cannot wait
To find out if we will be great (again)
Or if we will turn
The page and thus spurn
The chance to encourage debate

 

By now, I imagine most of you have figured out my preference for the election outcome and whatever your view, I sincerely hope you don’t hold it against me.  However, if that is the case, so be it.  In the meantime, whatever happened in markets yesterday and overnight just doesn’t matter at all as the opportunity for a major revision of perceptions is so large as to make any price information completely useless, at least in the US markets.

I have seen numerous studies showing the history of how markets behave in presidential election cycles, but I think it is a fair assessment that the current cycle is unlike any previous cycle that we have seen since, perhaps, just before the Great Depression.  Simply consider the massive amount of information that is available to the average person from numerous sources these days compared to anytime in the past.  As such, I don’t put much faith in any of those studies.

Which takes us to this morning.  Do we truly have any idea what the outcome will be?  I would argue not although we all have our favored outcomes.  And that bias, I believe, is deeply embedded in virtually every analysis.  As such, I will not try to analyze.  Rather, I will observe.

The first observation is that market implied volatility has been rising for the past weeks as the seemingly dramatic differences in policy outcomes depending on the ultimate winner mean market dislocations in either direction are quite possible.  

For example, let’s look at 1-month implied volatility in the major USD currency pairs this year as per the below:

Source: Capital Edge Corner via X

They have been rising steadily since early October as a combination of corporate hedgers trying to protect themselves and hedge funds and traders trying to profit from the dislocation have increased demand steadily.  The one truism here is that upon confirmation of a winner, regardless of the underlying move in the dollar, implied volatility is going to decline.

Much has been made of the ‘Trump trade’ which appears to mean that if Trump wins, the prospects for higher growth and inflation will steepen the yield curve, driving yields higher, while supporting the dollar (much to Trump’s chagrin) as foreign investors flock to US equities.  In fact, the most common explanation for the dollar’s decline over the past several sessions has been that Harris has improved in the polls.  

But it is not just the FX markets where implied volatility is rising, look at the VIX below, which is also showing a steady climb over the past two months.

Source: Fred.gov

That spike in August was the almost forgotten market response to the BOJ tightening policy and the -12% decline in the Nikkei just days after the Fed didn’t cut interest rates as many had hoped.  But if you eliminate that event, the trend higher remains intact.

Finally, the MOVE Index, which is the bond market volatility index shows very similar behavior, a steady climb over the past month especially, but truly trending higher since the summer as seen below:

Source: Yahoo Finance

My point is that given the growing uncertainty across all markets as well as the complete inability to, ex ante, determine who is going to win the election, the signal to noise ratio of price movement right now is approximately 100% noise, at least in financial markets.  Commodity markets have a bit of a life away from the election, so price action there is far more representative of true supply and demand issues.  Arguably, this is merely another consequence of the financialization of most things, the loss of market signals as they have been overwhelmed by the flood of liquidity provided by central banks around the world.

At any rate, until we know who wins, it will be difficult to establish a view of the near-term or long-term future of market activity. So, let’s recap the overnight session as its all we have left.

After yesterday’s equity selloff in the US, most Asian exchanges posted gains led by China (+2.5%) and Hong Kong (+2.1%) which responded to comments from Chinese Premier Li Qiang’s comments that, “The Chinese government has the ability to drive sustained economic improvement.”  And perhaps they do, although there are clearly issues regarding the local entities that are willing to gain at the expense of each other in order to demonstrate their own progress.  But Japanese shares (+1.1%) also rallied along with most of the region, perhaps a direct analogy to the US decline as the ‘Trump trade’ has included weakness in markets likely subject to Trump’s promised tariffs.  Meanwhile, in Europe, bourses have edged slightly higher this morning, between 0.1% and 0.2%, with no new data or news of note.  Interestingly, US futures are starting to trade higher at this hour (6:50), perhaps an indication of market beliefs, although just as likely part of the random walk down Wall Street.

In the bond market, Treasury yields (+3bps) are creeping higher again, also in line with the Trump trade, and that seems to be dragging European sovereign yields along for the ride as all those markets have seen yields climb between 4bps and 5bps.  Again, given the lack of new data, and the history of these yields following Treasuries, I see no other strong explanation. 

In the commodity markets, oil (+0.3%) continues its rebound and has now gained more than 6.5% in the past week.  The combination of OPEC+ delaying their planned production increases and seeming hopes for a pickup in Chinese demand on the back of the coming details of the stimulus package seems to have traders in a better mood these days.  As to the metals markets, they are all firmer this morning with gold (+0.2%) mostly biding its time ahead of the election, but both silver (+0.8%) and copper (+0.9%) starting to accelerate a bit.  Nothing has changed my view that regardless of the election outcome, this space is far more dependent on continued central bank policy easing and there is no indication that is going to end soon.

Finally, the dollar is softer again this morning, but in a more muted fashion than the past several sessions.  Although, with that in mind, we still see the euro and pound both climbing a further 0.25% and AUD (+0.6%) today’s leader after the RBA left rates on hold with a more hawkish statement than anticipated.  But the weakness is widespread with NOK (+0.4%) continuing to benefit from oil’s rise while ZAR (+0.6%) gains on the back of the rise in metals.  Of course, the currency that has seen the most discussion ahead of the election is MXN.  It is basically unchanged this morning, a perfect description of the narrative that the election will be extremely close.  However, a quick look at its price movement over the past week shows that it follows every bump in the polls.

Source: tradingeconomics.com

And that’s really it this morning.  We see the Trade Balance (exp -$84.1B) and ISM Services (53.8) but honestly, nobody is going to respond to that data.  Instead, all eyes will be on the early exit polls and the reporting of how the election is going.  No matter what, it seems hard to believe we will really have an idea before 10:00pm this evening, and then only if it is a blowout in either direction, seemingly a low probability.  So, today is a day to watch and wait if you don’t already have hedges in place because honestly, it’s probably too late to do anything now.

Good luck and go vote

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Fraught

Posted on by

The job growth that everyone thought
Existed, seems like it was fraught
Meanwhile ISM
Showed further mayhem
As growth slowed while prices were hot
 
The funny thing was the reaction
Where stocks were a source of attraction
But at the same time
Bond buys were a crime
With sellers the ones gaining traction

 

The NFP data was certainly surprising as the headline number fell to its lowest level, 12K, since December 2020 with the worst part, arguably, the fact that government jobs rose 40K, so there were 52K private sector job losses.  That is just not a good look, nor were the revisions to the previous months which saw another 112K jobs reduced from the rolls.  It cannot be surprising that the Fed funds futures market immediately took the probability of a rate cut to 99% this week and raised the December probability to 82%, up more than 10 points in the past week.  After all, Chair Powell basically told us that he has slain inflation, and they are now hyper focused on the employment mandate.  With that in mind, the futures reaction makes perfect sense.

Perhaps even more surprising was the market reaction, or the dichotomy of market reactions, which saw equity markets in the US rally nicely, with gains between 0.4% and 0.8% in the major indices, while Treasury yields spiked 10bps despite the data.  That yield spike helped carry the dollar higher as the greenback rallied smartly against virtually all its counterparts by more than 0.50%, and it undermined commodity prices.  

The most common explanation here, though, had less to do with the NFP data and more to do with the recent polls regarding the US election, where it appeared the former president Trump was gaining an advantage.  Remember, the ‘Trump trade’ is being described as a steeper yield curve with benefits for the dollar and US equities on the back of stronger growth and higher inflation.

There once was a US election
Where both candidates lacked affection
The worry it seems
Is half the world’s dreams
Are likely soon met with dejection
 
Meanwhile for investors worldwide
This week ought to be quite a ride
To all our chagrins
No matter who wins
Look for either outcome denied

However, this morning, the markets have changed their collective mind, with virtually all of Friday’s movement now unwound, at least in the bond and FX markets.  What would have caused such a reversal?  Well, the latest polls show that the race is much tighter than thought on Friday, with VP Harris gaining ground in a number of them, which now has most pundits simply calling for their favored candidate to win, rather than trying to read the polls.  As such, the Trump trade has been partially unwound and my sense is that until there is an outcome, it will be difficult for markets to do more than increase the amplitude of their moves amid less and less actual trading.  At least, that is true in bonds, FX and commodities.  Stocks, as we all know, are legally mandated to rise every day, so are likely to continue to do so. 

And now, despite the fact that the Fed meets on Thursday, with a rate cut all but assured and ostensibly a great deal of interest in Chairman Powell’s press conference, all eyes are on the election.  Remember, too, not only is that the case in the US, but also around the world.  Whether friend or foe of the US, pretty much all 195 nations on the planet are invested in the outcome.

With that in mind, and since this poet has no deep insight into the outcome, let me simply recount the overnight market activity with the understanding that many trends have the opportunity to reverse depending on the results.

Starting with equity markets, Japanese shares (-2.6%) fell sharply as a combination of both their domestic political struggles (remember their government situation is unclear after the recent snap election) and the significant rebound in the yen (+0.9%) weighed on equities there.  India (-1.2%) also struggled but elsewhere in the time zone, stocks rallied nicely led by China (+1.4%) and Korea (+1.8%) as visions of that Chinese fiscal bazooka continue to dance in investors dreams.  Interestingly, the WSJ had an article this morning downplaying the idea, which based on their history makes a great deal of sense to me.  Turning to Europe, most markets there are firmer, albeit only modestly so, with gains from the CAC and IBEX (+0.3% each) outpacing the DAX (0.0%).  Finishing off, US futures are basically unchanged at this hour (7:00).

In the bond markets, while the Treasury move Friday did help drag European yields somewhat higher, it was nothing like seen in the US and this morning, those yields are essentially unchanged, +/- 1bp in most cases.  The only data of note was the final PMI data which confirmed the flash data from last week.  As to JGB yields, they have been stuck in the mud for a while now, still hanging below the 1.0% level with no designs of a large move.

Oil prices (+3.1%) are rebounding nicely on news that OPEC+ has delayed their previous plans to start increasing production as of December this year.  Concerns about oversupply in the global market plus the return of Libyan production and record high US production have convinced them they better leave things as they are.  Metals markets are a bit firmer this morning with gold (+0.2%) actually somewhat disappointing given the magnitude of the dollar’s decline, while both silver (+1.25%) and copper (+1.1%) show nice gains.

Finally, the dollar is under severe pressure across the board.  The biggest gainers are MXN (+1.2%), NOK (+1.2%) and PLN (+1.1%) although most gains are on the order of 0.7% or more.  Certainly, the oil story is helping NOK, and given the concerns that traders have about prospective tariff increases on Mexico if Trump wins, the idea that the race is closer than previously thought has supported the peso.  As to the zloty, it seems that their PMI data, printing at 49.2, a fourth consecutive rise) has traders looking for a more hawkish central bank on the back of stronger economic activity.

On the data front, aside from the election and the Fed, there is other information, although it is not clear that anyone will notice.

TodayFactory Orders-0.4%
TuesdayTrade Balance-$84.1B
 ISM Services53.8
ThursdayBOE Rate Decision4.75% (current 5.00%)
 Initial Claims223K
 Continuing Claims1865K
 Nonfarm Productivity2.5%
 Unit Labor Costs1.1%
 FOMC Rate Decision4.75% (current 5.0%)
FridayMichigan Sentiment71.0

Source: tradingeconomics.com

Of course, the election will dominate everything, and it certainly appears that there will be legal challenges from the losing side regardless of the outcome.  My expectation is that markets will remain jumpy with outsized moves on low volumes until there is more clarity.  It is not often that an FOMC meeting is seen as an afterthought, but much to Chairman Powell’s delight, I sense that is going to be the case this week.  

I have already voted early and I encourage each of you to vote as the more voices heard, the better the case the winner will have at achieving a mandate.  And the reality is, we need a president with a mandate if we are going to see broad-based positive changes in the nation going forward.

Good luck

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