Tag Archives: stocks

Doomed

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Is civilization now doomed
As bond yields, o’er 5%, bloomed?
Or are those who say
The end’s any day
Just hoping their clicks will have boomed?

I ask because it’s hard to square
The stock market with yields up there
The pundits explain
High yields are a bane
Investors, though, don’t seem to care

A PSA to start.  For the next several weeks FX Poetry is going to be sporadic, if it shows up at all as I will be embarking on a road trip to the Doberman Pinscher Club of America National dog show in Topeka, Kansas and following that visiting family in Texas.  We have been told that Marvel has a good chance to do well there, although the competition will be stiff.  Nonetheless, here he is.

When I have time, I will try to write, but I am confident that the markets will continue to function while I am gone.  And more importantly, I am confident that the world will not end, even if bond yields head a little higher from here.

Let’s start with bonds since that is the topic du jour.  Below is the history of 10-year Treasury prices since 1953 from the FRED database.  I have taken the month-end data and drawn both the average and median lines in as well.

Once again, I ask you is 5% on the 10-year the anomaly?  Or was 1% on the 10-year the anomaly?  Throughout this entire time, the US economy managed to get by.  Certainly, there were difficult times as rampant inflation in the 1970’s led to Paul Volcker’s dramatic efforts to withdraw liquidity from the system, thus driving rates higher which resulted in the twin recessions of the early 1980’s.  Now, to my eye, the current level of 5.18% (-2bps on the day) does not look like it is unusual.  In fact, it is firmly between the median (4.79%) and average (5.52%) levels on the chart.

And as I wrote yesterday, economic activity continues apace, in fact I would argue faster than apace.  The Trump administration is all-in on the run it hot thesis and with inflation at 3.4% and real GDP at 5.1%, that implies nominal GDP is rising at 8.5% annualized.  Even with the excessive government spending, and it is excessive, nominal GDP growth at that pace will result in a reduction in the debt/GDP ratio over time.  Remember, the budget deficit is running at 6% or so, far lower than that GDP figure.

This is by no means an ideal situation, however, it is a sustainable one.  And consider this as well, all that interest getting paid is part of the income streams for all the holders, many of whom are domestic.  Recall, a major angst among the doomporn writers is that foreigners stopped buying Treasuries.  That means domestic accounts own more and get paid more interest to recycle into the economy.  Again, not ideal but certainly sustainable.  The end is not nigh.

What about the rest of the world?  Well, while their yields are rising as well as you can see in the below chart from tradingeconomics.com, their growth rates are not keeping pace with the US.

As you can see in the below table from tradingeconomics.com, the rest of the world has a much bigger problem with rising yields than does the US.  

Our economy can clearly sustain them far better than any other economy which is one of the reasons that the equity markets in the US continue to perform so well and the primary reason that the dollar continues to perform so well.  After all, the consistent drumbeat of announcements of new factories to be built in the US from Honda and Hyundai to TSMC and Samsung and every defense and pharma company in between, not to mention Nippon Steel’s expansion of the old US Steel facilities, is driving demand for dollars.

Again, doom may get clicks, but reality is far better than they make it out to be.  And we know this because equity investors continue to be willing to hold US equities in record numbers.  Earnings in the US continue to grow, in fact fast enough to reduce some of the overvalued multiples that we have seen over the past several years.  So, while yesterday was a nonevent in US equity markets, the fact that was the outcome despite another sharp rise in yields tells you all you need to know.  Overnight, China and Taiwan were closed, but we saw gains in Tokyo (+1.3%), Korea (+0.9%), India (+0.4%) and most of the region although HK (-1.0%) and Australia (-0.4%) lagged.  

In Europe, though, the week is ending on a positive note with gains across the board (Spain +1.0%, Germany +0.7%, UK +0.3%, France +0.1%) and US futures are also higher at this hour, +0.4% or so.  And Germany managed this despite a terrible reading from the GfK Consumer Confidence survey of -30.6, far worse than last month or forecasts.

In the commodity markets, oil (-2.4%) is sliding this morning as there appear to be ongoing talks to both reopen the Strait of Hormuz and end the US naval blockade, an outcome that would likely see oil prices, and the products as well, fall sharply.  Meanwhile, gold (+0.7%) and silver (+1.6%) are bouncing a bit this morning as the chain of thought appears to be lower oil prices => lower interest rates => more attractive gold, or something like that.  Nothing has changed my long-term view on the precious metals nor on copper, which if the US economy continues to grow like it has been will see significant demand going forward.

Finally, the dollar, after a two-week run is backing off this morning on two things.  First, apparently when PM Takaichi and President Trump met, the yen was part of the discussion and last night we heard verbal intervention from FinMin Katayama taking the yen higher by 0.75%.  As to the rest of the G10, smaller gains, on the order of 0.1% to 0.2% are the order of the day.  In the EMG bloc, we are also seeing strength with KRW (+0.95%) the leader although ZAR (+0.8%) is also having a fine day as gold rebounds while the rest of the bloc, whether LATAM, CEE or APAC has seen much smaller gains, 0.3% or less.  Again, the dollar is not going to disappear or be replaced.  And frankly, I think we remain in the range of the past year for a while still.

On the data front, this morning brings Durable Goods (exp -0.4%, +0.6% -ex Transport) and then Michigan Sentiment (47.6).  We also hear from a few more Fed speakers which will almost certainly serve to reinforce the idea that they are going to tighten policy further.  Currently, the futures market is pricing a 2/3 probability of an October hike.  Personally, I wish they would stop expanding the balance sheet before hiking again, but Keynesianism won’t allow them to think that way it seems.

Wrapping up, I see more good than bad on the horizon which should be positive for risk assets.  At the same time, at 5.2%, 10-year yields are very attractive for a lot of people as an alternative to equities.  After all, the hype about the highest yields in more than 20 years means that those on a fixed income have not been able to get these yields in more than 20 years.  Historically, 5% was seen as a pretty fair return for bonds.  Maybe this is the new equilibrium.

Good luck and good weekend

Adf

Traders are Pining

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Risk appetite’s back on the menu
Across almost every stock venue
Bond yields are declining
As traders are pining
For times when our lives were less tenu (ous)

The proximate cause driving prices
Is hope the Iranian crisis
Is nearing its end
Thus, bulls all contend
‘You must buy’ when they give advices

While it may be the first day of Autumn, the markets have a distinctly summer doldrums feel to them this morning.  Crude prices (-3.1%) are sliding and that has encouraged buying of stocks and bonds across the board.  For instance, looking at the below screenshot from tradingeconomics.com, you can see that only Russia, of markets currently open (Tokyo was closed for Autumnal Equinox Day, and Canada, Mexico and Brazil are not open yet) has suffered today, and given oil’s decline, that makes sense,

If we look at the bond market, we also see bonds in demand (yields falling sharply) as Treasuries and all of Europe are having great days per the Bloomberg screenshot below.

So, is this all about oil prices?  In truth, I believe that is the largest part by far.  If we look at a chart of WTI prices vs. the S&P 500 over the past month, you can see that the tendency is toward a negative correlation, especially over the last week.

Source: tradingeconomics.com

And sometimes, things are just that simple.  While this is UN week and much has been made of the fact that President Trump is going to be meeting with President Xi later this week, as well as Japanese PM Takaichi, discussions of that nature, while potentially important on a geopolitical scale, typically don’t involve or impact financial markets directly.  In the meantime, we have just gone through every major central bank meeting in the past two weeks, so nothing is on the immediate horizon and there is no economic data of note scheduled to be released this week.  Which brings me back to oil as the driving force in markets right now.

As I scan headlines across the WSJ and Bloomberg and look at my X feed for the key information, things are turning toward the upcoming midterm elections as the next source of interest.  And of course, now that the NFL is back at it, along with college football, MLB and the approaching NBA and NHL seasons, there is plenty of nonmarket stuff to keep people busy.  And after all, there are many who believe it is their birthright to earn 15%+ each year on their equity investments, so aren’t worried about little things like earnings or business conditions.

Speaking of elections, one cannot ignore the two state elections in Germany this past weekend where in the state of Mecklenburg-Western Pomerania (they need better state names), not only did AfD win the largest share, 38.2%, but Chancellor Friedrich Merz’s CDU failed to win the requisite 5.0% of votes to remain in the state parliament chamber, a historical first.  I raise the point because it is simply another demonstration of the idea that people around the world are unhappy with the current situation in their countries and are seeking change.  

The nature of that change remains uncertain, as both populist left and populist right have been gaining votes, while the center is getting decimated.  And there are many other elections in large countries coming up, notably Brazil, where the polls are basically tied between incumbent Lula da Silva and the challenger, Flavio Bolsonaro, son of former president Jair Bolsonaro and where there is additional political intrigue regarding how the courts there have been behaving.

In fact, as I survey the world, it appears that the 4th Turning is clearly on track, and whether it peaks in 2027 or 28 or 30, it is coming soon to a screen near you.  I know that I have been looking at my personal investments through the lens of what can happen in a situation where institutions change and I believe that would be something important to consider as we all look ahead.

Ok, as to the markets not covered, FX is the main one but other than KRW (+1.0%) which saw the 20-day Export data jump 78.3%, nothing else happened.

Otherwise, the dollar is +/-0.15% or less vs. every major currency although the trend is very mildly positive for the dollar.

And in the metals markets, that modestly stronger dollar is seeing weakness in gold (-0.7%) and silver (-0.2%) although copper (+1.5%) is having a good day as there are more and more discussions regarding long-term shortages and absence of new supplies.

On the data front, the noteworthy thing is we get too much Fedspeak this week, but here are the few data points coming.

TodayChicago Fed National Activity0.2
WednesdayFlash Manufacturing PMI53.5
 Flash Serv ices PMI56..0
ThursdayInitial Claims203K
 Continuing Claims1735K
 New Home Sales620K
FridayDurable Goods-0.3%
 -ex Transport0.6%
 Michigan Sentiment47.5

Source: tradingeconomics.com

As to Fed speakers, we hear from eight speakers across eleven different venues this week and we have already seen the Chicago Fed’s Austan Goolsbee tell us the road to 2% inflation may not be painless in Bloomberg this morning and he is not one of the eight.  The point is, these folks love to hear themselves speak about things and love their 15 minutes of fame, that’s for sure.

To me the question is, has any part of the long-term story changed?  I don’t really think so.  In fact, while I usually believe politics doesn’t really impact markets, at least not directly, I have a feeling that we could see some major policy changes upcoming if elections bring in new views as to how things should be done.  That is the biggest wild card I see in the future but have no idea which way that card will fall.  In the meantime, I believe that we are going to see increased volatility overall, despite today’s lack of movement, so keep positions close to the vest.

Good luck

Adf

Before We All Die

Posted on by 
Like a fledgling bird
Rates in Japan edged higher
Will they really fly?

As universally expected, the BOJ raise their base rate last night by 25 basis points to 1.25%.  Much has been written about how this is the highest rate since 1995 which only tells me that Japan has had major problems for more than 30 years.  If you simply consider the idea that the interest rate represents the demand for money, either Japanese companies and people didn’t need any, or had a surplus of the stuff.  My money is on the latter.  At any rate, as you can see from the below chart, the rate hike did nothing to help support the still-beleaguered yen.

Source: tradingeconomics.com

On the chart, it shows all the interest rate moves of the last year and while the last two hikes coincided with MOF intervention and saw yen strength, I think the combination of the lack of intervention, the ostensible hawkishness from Fed Chair Warsh (I still don’t see that but I am in a minority) and the fact that the vote was 7-2 with two BOJ doves, Sato and Asada, voting to leave rates on hold seem to have undermined any chance for the hike to support the currency.  So, JPY (-1.1%) is the worst performer on the board today.  Now, we are still basically at the levels seen in the wake of the joint intervention at the end of July, but the recent trend cannot be comforting for Ueda-san, Takaichi-san or Secretary Bessent.

For now, the carry traders are back in fine fettle, especially those who added to their positions (and I’m sure many did) after the GPIF JPY purchases.  Here’s the thing about currencies: they tend to trend for long periods of time.  While many markets e.g., (interest rates, volatility) show reversion to the mean as an underlying property, that is not the case in FX (or equities!)  So, if we step out to a longer view of USDJPY, as you can see from the FRED chart below, after a 40-year trend of a stronger yen which peaked (dollar bottomed) in 2011, for the past 15 years, the yen has largely weakened.  Back in the beginning of the year, I forecast 180 as a year-end level, and while that may be aggressive, absent massive fiscal policy changes in Japan (i.e. austerity) or in the US, I fear we will be closer than further three months hence.

But meantime, while stocks here are rising
The narrative still is advising
To shackle AI
Before we all die
When there is a robot uprising

So, here’s the thing.  It’s not that I want to ignore what is happening in the Middle East, obviously, it is very important with respect to energy prices and supplies and by extension the evolution of economic activity around the world.  But it is hard to make much sense out of the recent price action in oil, which, while lower today by -1.2%, and by -4.8% in the past three sessions is still very clearly trending higher and has been since early August as per the below chart from tradingeconomics.com.

I read the same news you do, about the Houthis taking over much of the Red Sea, although the Yemenis apparently did them some material damage this morning, and who really knows what is going on in Iran since everything about it is propaganda from both sides.  One truth is Ukraine continues to destroy Russian refineries and that is having the biggest impact, I think, as products are not being produced and while I doubt we will see shortages in the US, prices here for gasoline and diesel can certainly head higher.  But I wonder, if global diesel prices rise, is the US really at a relative disadvantage economically?  After all, we are amongst the most energy efficient economies in the world.  Nonetheless, it will be painful on the pocketbook.

Which takes me back to the ongoing AI discussion/argument and what is happening there.  Let me start by saying, there are exactly zero companies that are altruistic.  With that as background, the idea that Anthropic and OpenAI are begging for regulation because they are afraid what they are doing will end mankind is, truthfully, pathetic.  AI is a remarkable tool, and one that is clearly improving at lightning speeds, but unfortunately for those who are trying to make the case that it is the most dangerous thing ever built, the story of the boy who cried wolf has too many similarities.  This can be seen from the politicians who are now pushing this story with the demise of their climate change narrative, and their covid narrative and every other narrative they have foisted on us over the past 50 years.  But it is regularly the same people.  And we all know that doom sells hence the amount of doomporn that sells itself as financial analysis or geopolitical analysis.  This is the best clip I have seen from a serious individual describing the situation at these companies.  I think it is worth the one minute plus to listen to Steve Eisman here.

 As to the rest of the markets, equities had a nice day yesterday with oil’s decline, as US markets, and basically every major Asian market overnight all showed material strength.  Alas for Europe, this morning has seen declines of -0.7% to -0.9% across the board.  There don’t appear to be any specific catalysts to drive this movement with most attributing it to some profit taking after several positive sessions in a row.  If we look at the Fear and Greed Index, it is heading lower as per the below chart, so perhaps that is some of the driver, although that wouldn’t explain Asia or the fact that US futures are all pointing higher this morning by +0.2% or so.

Turning to the bond market, yields, which had slipped a bit yesterday are higher by 2bps in Treasuries and European sovereign yields are all higher by between 2bps (Germany) and 6bps (France).  It seems the fact that Europe appears to be preparing to enter the Russia/Ukraine war and need to borrow yet more money to arm themselves, is not helping things.  As to JGB yields, after the BOJ move last night, they slid -1bp.

With oil prices slipping this morning, we are seeing metals behave quite well (Au +1.0%, Ag +2.9%) although copper is unchanged on the day.  That negative correlation remains firmly intact.

Finally, the dollar continues to hold its recent gains.  Away from the yen, most currencies are softer by between -0.1% and -0.3% in both G10 and EMG spaces, but I must admit, most of the discussion remains dollar focused rather than currency specific focused.  One thing worth mentioning is KRW (-0.45%) which after a remarkable rally since early July increased the value of the won by nearly 17%, it has reversed course over the past two weeks and given back nearly 5% of that move.  In truth, it wouldn’t be surprising if this was just a trading reaction, but the consistency of movement in both directions has me wondering if there is something else going on, although at this point, I am not sure what it is.

Source: tradingeconomics.com

On the data front, this morning brings IP (exp 0.3%) and Capacity Utilization (76.4%) at 8:30 and then Leading Indicators (0.1%) at 10:00, with Governor Bowman speaking at 9:30.  It will be interesting to hear if she is hawkish or not, but I wonder, will the narrative call her that regardless?  Certainly, it appears that there are a lot of folks who really want the Fed to continue to hike rates.  Personally, I am not in that group.

As to today, absent some new news from the Middle East, I suspect that we are going to finish the week the way it has been going, firmer stocks, lower oil and a dollar stuck in the middle.

Good luck and good weekend

Adf

One Hawkish Dude

Posted on by 
In what cannot be a surprise
The Fed funds rate surely did rise
But look at the Dots
My read is those spots
Do not portend hikes called king-size

The funny thing is the new mood
Is Warsh is now one hawkish dude
Most pundits agree
That what we’ll now see
Is hikes of a great amplitude

But when I look at the dot plot
One more hike is all that they’ve got
Then, as time progresses
The best of their guesses
Is rates will be falling a lot

I feel very out of touch with the punditry this morning as the virtually unanimous view was that Chairman Warsh was quite hawkish in his press conference and from what I have read this morning, the Fed is embarking on a series of rate hikes to address inflation.  However, that is not what I took away from yesterday’s events.  In fact, if you look at the below chart which was published in the WSJ this morning and is truly quite helpful in showing the dot plot and the Fed funds rate next to each other and on the same scale, the median view is for one more rate hike this year and then a hold and decline going forward.

However, my view is clearly a minority one right now.  As you can see in the cmegroup.com table below, futures are pricing about a 50% probability of a hike in October and the certainty of one, plus a chance for more, by December with two more coming next year.

Again, that is far different than the dots and not what I heard, but then, I am just a poet.  So, let us turn to how markets responded to the event.  Below is a chart of both the 2yr (in green, LHS) and the 10yr (in blue, RHS) over the past 24 hours.  While both curves show a similar shape, be sure you look at the Y-axes as the increments are wider for the 2yr than the 10yr.  

Source: tradingeconomics.com

As of this morning, the 10-year is essentially unchanged while the 2yr yield has climbed about 6bps, implying the cash bond market, too, is looking for more hikes sooner rather than later.  We have discussed the logic behind hiking rates at this time, but oftentimes logic does not matter, at least not for a while.

As to equity markets, while both the DJIA and SPX closed lower yesterday, the NASDAQ was unchanged by the end of the day, as you can see from the chart below, those losses have also been recouped.

Source: tradingeconomics.com

In fact, green is this morning’s color with all of Europe and US futures all higher as I type at 6:00.

Source: tradingeconomics.com

Although, in fairness, China (-0.5%) and HK (-0.4%) didn’t have as much fun, much of Asia also was higher overnight.  It appears that the idea that central banks are set to fight inflation more aggressively, as confirmed by the Fed’s hike yesterday, has equity investors feeling better about themselves.

And that idea remains cemented in traders’ collective views as my new favorite website on the topic, rateprobability.com, continues to show plenty of hikes in the pipeline.  Interestingly, though, this morning’s BOE meeting is only showing a 24% probability as of 6:40am, 20 minutes before the release.

But now let’s turn away from the central banks and see what else is happening.  Oil prices (-1.8%) are slipping again as it appears the latest attacks on Saudi infrastructure have stopped and the Saudis claim they will have restored the bulk of the flow to Yanbu in the Red Sea within weeks.  At the same time, inventory data from the US continues to show plenty of oil around, as well as gasoline, although distillates are not as prevalent.  And of course, with oil lower, we cannot be surprised that the metals complex is higher (Au +1.25%, Ag +1.2%, Cu +1.3%).  

Finally, the dollar, after a 6-day run higher, is consolidating with the DXY now slightly above 100.00.  However, as I have been saying for quite a while, the reality is the dollar is doing very little overall, having traded both sides of 100 regularly and not trending in any direction.  

Source: tradingeconomics.com

Now, USDJPY (-0.4%) has bounced from its recent lows (yen highs) although remains below the levels of the initial intervention from the end of July as per the below chart.  And with the BOJ set to hike rates tonight, absent a massively hawkish message from Ueda-san, I think 154-156 is going to be the new home for a while.

Source: tradingeconomics.com

Looking across the rest of the currency universe, there are several moves today in line with the yen strength as ZAR (+0.55%), SEK (+0.4%), and NZD (+0.4%) are all having solid sessions with the rest of the lot +/-0.15% or less.  Again, I ascribe this more as a reaction to recent price moves than to anything new in the world.

And that’s really it in the markets this morning.  Fortunately, AI has not yet killed us all, although we continue to hear from various players that it is a civilizational threat.  The biggest problem those people have is that we have recently seen several civilizational threats that just didn’t come true, whether Covid, the reelection of Donald Trump or the strong showing by AfD in Germany.  Climate change is certainly biding its time if it is going to kill us all, and to my knowledge, CO2 is still exhaled by everyone who has informed us that CO2, if it reaches 0.045% of the atmosphere, will end life.  Perhaps that is what AI will do.  Perhaps it will take control of all the oil drilling and coal mining around the earth, expand it, combust it and drive that CO2 number up high enough to do the job!

On the data front, the UK left rates on hold, as largely expected, but I guess that means they will be hiking next time.  In the US, we get the weekly Initial (exp 208K) and Continuing (1780K) Claims data as well as Housing Starts (1.31M), Building Permits (1.41M) and Philly Fed (30.5) all at 8:30.  And that’s it.  The BOJ will be hiking rates tonight and there are no Fed speakers on the calendar today, although we will hear from Governor Michelle Bowman tomorrow morning.

The hawks are certain that Chairman Warsh has joined their club.  Personally, I think he is biding his time until the task forces report so that he can start to make the changes that are necessary at the Fed since it clearly has not done its job properly for many years.

As to the dollar, there is nothing exciting on the horizon overall, although I guess a surprise from Tokyo tonight could change a few views.

Good luck

Adf

Monet’ry Bleating

Posted on by 
Today it is all about Kevin
And whether, bond markets, he'll leaven
But what if his talk
Does naught to unlock
His views? For bond bears t'will be heaven

Remember, the them of this meeting
Is payments, not monet'ry bleating
Well, if that's the case
There will be a race
In which, only short, are competing

Markets have remained quiet for the past several sessions as investors, traders and algorithms all turn their focus to Jackson Hole, Wyoming this morning awaiting the sage comments of Fed Chair Kevin Warsh.  The market punditry seems convinced he will lay out things like his reaction function to data and his views on where monetary policy is headed.  Of course, I think they are talking their book as they are desperate to write about that.  We know this because all they have written about lately is how awful Warsh is for not telling them all that stuff.

But I have a sneaking suspicion that any discussion of monetary policy will be fleeting, at best, as the title of the symposium is “Financial Innovation: Implications for Payments and Policy.”  Frankly, this sounds like an opportunity for Warsh to wax poetic on the future of money and stablecoins and how the Fed will deal with these new vehicles and their impact on monetary policy.  I have already discussed the idea that stablecoins are going to be inflationary in their own right, and here is an article that describes the situation better than I can.  But in this context, and with the potentially major ramifications of the US government’s embrace of stablecoins, it would not be a surprise for Chairman Warsh to essentially ignore the current interest rate structure and focus entirely on the balance sheet.

If that is the direction of his speech, I expect that the bond bears will look to double down and really hit the futures market hard, driving yields higher extending the recent move seen in the chart below.

Source: barchart.com

But I also do not rule out Secretary Bessent taking advantage of that and buying them aggressively.  Would it really be a surprise if Bessent, a former hedge fund trader who understands both bond math and the way markets work extremely well, used his ‘at least’ $4 billion of buying power to purchase futures, utilizing leverage to expand the impact significantly?  At current margin levels, that $4 billion could purchase at least $60 billion equivalent in futures or 600,000 contracts in the first week of activity alone.  I think that could drive a pretty good short squeeze, exactly what Bessent wants to see.  Below is a chart of the Commitment of Traders report for 10-year note futures showing a net short of ~915k.  What kind of impact would buying 600k futures have?

Source: cotsignal.com

My take is there would be quite a few hedge fund traders whose bonuses would be negatively impacted!

This is all speculation, obviously, but from what I have read around, the market is really looking for something I sense Warsh is not going to give them.  Prepare for more volatility ahead after several weeks of limited movement.  Just sayin’.

In the meantime, let’s run down market movements overnight, although there was not a lot of excitement.  Yesterday’s US rally was followed by broad-based, albeit not excessive, strength throughout most of Asia (Japan +0.4%, HK +0.1%, Australia +0.6%, Taiwan +0.8%) although both China (-0.4%) and Korea (-1.8%) did not partake.  Given the Nvidiphoria, Korea is a surprising outcome, but volatility in that market has been extreme as I have shown in the past.  

European bourses are also higher this morning (France +0.9%, Spain +0.5%, German +0.5%) after data showed improved business confidence throughout the continent although GDP continues to be lackluster (e.g., France 0.7% Y/Y in Q2).  But sentiment indicators are picking up there slightly and, after all, equity markets are supposed to be forward looking.  Maybe things will get better in Europe, although given their energy policies and the fact that they are behaving far more like grasshoppers than ants these days with respect to Natural gas storage (see chart below), things may get tougher if they are wrong about global warming.

As to US futures, at this hour (7:15) while NASDAQ futures are softer (-0.6%) the other two major indices are essentially unchanged ahead of Mr Warsh.

In the bond market, yields continue to creep back higher with Treasury yields (+1bp) the best performer after JGB yields (+4bps) rose overnight and European sovereign yields have climbed between 2bps and 3bps this morning.  As I highlighted yesterday, or more accurately, the WSJ did the work for me, European yields have been climbing more rapidly than US yields lately as European nations have demonstrated no ability to rein in spending, and in fact, are planning the guns AND butter approach as they build out their defense capabilities while maintaining their nanny states.  What can possibly go wrong? 🙃

In the commodity space, we continue to hear that the Strait of Hormuz is either open or closed depending on the source, although the fact that oil continues to flow has me leaning toward more open than closed.  This morning WTI (-0.6%) is slipping a bit, although it rallied a bit yesterday.  There was a very interesting article in Bloomberg yesterday regarding the shale drillers’ ability to increase production dramatically by using more surfactants (soap) to help the oil flow, gains of 20% or more in a well, which simply reminds us of the amazing technology that exists in that sector.  There is no shortage of oil folks, and likely never will be.  As to the metals markets, gold is flat this morning and silver (+1.3%) is rising again, back above $70/oz.  Copper (+0.6%), too, is having a solid session.  Nothing has changed my views on the metals going higher over time.

Finally, the dollar has been stuck in neutral as we await Chairman Warsh with the DXY still hovering right above 99.00.  We have not discussed the yen (-0.2%) much lately as it has not been noteworthy, but now that it has been one month since the major intervention, I thought it worthwhile to take a peek at the chart and see how its doing.

Source: tradingeconomcis.com

I challenge you to explain the difference to me between the price action after the last interventions and this one.  The intervention in May took about 6 weeks to unwind and the yen continued lower for another 6 weeks before they stepped in again alongside the US.  Pretty much the only thing I can see that really stops this move is if I am right about Bessent squeezing the shorts and driving yields sharply lower.  In that case, USDJPY would fall sharply without intervention.  Otherwise, it’s hard to get excited about anything in the FX markets right now.

And that’s really it for today.  At 8:30 Canadian GDP (exp 3.4%) is released and then we see Chicago PMI (57.0) and Michigan Confidence (51.0) when Warsh starts to speak.  We also get the annual NFP revision although I have not seen any estimates for that.  But as I have said all week, it’s all about Kevin.  Now we wait and see.

Good luck and good weekend

Adf

A Great Deal of Sorrow

Posted on by 
With Warsh set to speak on the morrow
The rate at which we all can borrow
Has been creeping higher
Which for some is dire
And causing a great deal of sorrow

The question is what will he say
Inflation'ry fears, to allay
Seems most want to hear
That during this year
Fed funds will rise without delay

Arguably, the biggest story this morning is that Nvidia’s earnings beat handily and Jensen’s forecasts were even more bullish.  The upshot is NASDAQ futures are rallying (+0.7%) and we saw strength in the tech sectors in equity markets overnight (Korea +1.5%, Taiwan +0.3%, China +0.9%), although it was not as euphoric as might have been expected.  I read this morning that price targets for Nvidia have been raised dramatically now, so there doesn’t seem to be any slowing of that thought process.

But otherwise, bond markets remain the focus as the combination of Secretary Bessent’s efforts to hold down long-term yields and anticipation of Fed Chair Warsh’s speech tomorrow are the main topics of conversation.  Interestingly, as much as the punditry loves to hate the US for its fiscal profligacy and the story of US yields rising has been top of mind, this morning the WSJ reminded its readers that the story in the US is not quite as bad as that in other major nations like France, Italy, the UK and Japan.  The below chart leads the story on the subject and is worth seeing.

The point is that virtually every Western nation is in the same boat and is likely to stay there for the foreseeable future.  The global regime that had been in place for upwards of 40 years; globalization leading to outsourcing manufacturing and financialization of major corporations is changing before our eyes.  Covid awakened many to the fact that the G10 had become dangerously reliant on China as a supplier for too many critical inputs which led to serious strategic concerns and weakness.  As that perceived weakness is being addressed by nations around the world, it turns out it costs a lot of money to do so, and nations are struggling to figure out how to pay for it.  Promises made when those nations could apply all their tax revenue to social causes are hard to keep when those resources are now being called upon to address strategic and security needs.  Hence the massive borrowing we have seen throughout the G10 and the corresponding rise in government bond yields.

But one of the interesting things about this process is that despite government yields rising, corporate bond yields have been quite well behaved, with credit spreads remaining near their tightest levels ever.  I saw this chart this morning which helps explain that seeming anomaly and it helped clarify my thinking.

Basically, it is explaining that US corporates during Covid refinanced their debt at the rock-bottom levels of the time and reduced their interest expense dramatically.  Meanwhile, due to arguably the single greatest fiscal policy error of all time by then Secretary Janet Yellen, the US didn’t term out its debt, instead going the other way, issuing more T-bills when yields were low, thus government interest payments, as we hear on a daily basis, have climbed dramatically. I’m still waiting for some news organization to ask her about this boneheaded decision, but I won’t hold my breath.

At any rate, the bond market story is the one currently with legs and I assume that will be true at least until Chairman Warsh speaks tomorrow.  While speeches of this nature are often quite dry, I am truly looking forward to hearing what he has to say.

In the meantime, let’s see how other markets are behaving this morning.  After yesterday’s very modest declines in the US, the rest of Asia was mixed as Tokyo (-0.25%) slid alongside HK (-0.3%), neither being a major concern.  Australia (-1.0%) was the worst performer out there after stronger Household spending data bolstered the case for an RBA hike next month raising the probability to 54%.

Europe, however, is having a tougher time this morning led by Paris (-1.1%) where concerns are rising based on both a Fitch credit review of the country (last year they were downgraded one notch to A+) as well as growing uncertainty over the presidential election next year as the main candidates describe their policies to business leaders in a debate format.  But both Spain (-0.5%) and the UK (-0.5%) are also under pressure with only Germany (+0.2%) bucking the trend after a slightly better than expected GfK Consumer Confidence reading of -26.6.  I think it is worthwhile, though, to get a better idea of the situation in Germany, and by extension all of Europe, to look at that confidence measure’s history below.

Source: tradingeconomics.com

Sure, the reading was better, but how awful must confidence be in Germany.  I guess this is the way people respond to their suicidal energy policies.

While I discussed bonds in general above, I didn’t mention the overnight movement which has seen yields continue to edge back higher led by Treasuries (+2bps) with European sovereigns right there, rising between 1bp and 2bps.

In the commodity markets, oil (+0.3%) has been trading around unchanged all night as it was slightly lower when I first sat down.  We continue to hear conflicting stories about the situation in Iran and the Gulf and whether tankers are transiting the Strait, but we have still not seen any blowout in prices.  EIA inventories yesterday showed a small net draw in gasoline and distillates, but crude remains available and Cushing inventories are being rebuilt.  As to metals, gold is flat this morning with silver (+0.6%) edging higher.  There continues to be real support for the precious metals as both grind slowly higher.

Finally, the dollar continues to languish, doing very little overall.  Despite much excitement several weeks ago about the dollar breaking out higher, the fact remains that the DXY is basically in exactly the same place it was in April 2025 as you can see below.  As I have repeatedly explained, at some point the dollar will matter again to markets, but I’m not sure what will drive that change.

Source: tradingeconomics.com

As it is Thursday, we see the weekly Initial (exp 208K) and Continuing (1790K) Claims data.  We also see the Goods Trade Balance (-$99.0B) and then some tertiary data.  Today has all the hallmarks of a sleeper as we await Chairman Warsh tomorrow.   

Good luck

Adf

In Tears

Posted on by

As I wrote yesterday, “at least” did a lot of work in the Treasury announcement as it opened the door for significantly larger purchases of longer dated bonds, enough to truly have a market impact.  Most of the initial analysis on the announcement focused on the extra $2 billion to be purchased in each operation.  But what if, instead of $2 billion, they purchase $50 billion each time?  Suddenly, that is a significant reduction in long bonds outstanding, and the program will have a much greater price impact.  Which leads to this Bloomberg headline and story, Bessent Says He’s Ready to Expand Treasury Buybacks.  I believe it would be a mistake to dismiss the Treasury’s ability to achieve their goals as, after all, they do make the rules.

The upshot is that after a one-day rally in bonds, yields retraced those early declines (see chart below) and stocks fell sharply yesterday, clearly not the desired outcome.  

Source: tradingeconomics.com

Much hay has been made regarding the total US debt surpassing $40 trillion the other day, although I see that as merely a reaction to a big round number, not dissimilar to a trading situation in, for example USDJPY, where the market is focused on 160.00 and a break is seen as significant from a trading perspective, but less so from a policy perspective.  I am not seeking to downplay the problems that exist in the US regarding fiscal policy.  I am, after all, a hard money guy (it’s why I am working on USDi, the only inflation tracking cryptocurrency) and a proponent of a much smaller government with much reduced spending.  And that is what is necessary to address the problems at the root.  But that takes Congress and, alas, seems highly unlikely anytime soon.  Personally, I will not bet against Bessent, but that seems to be a popular idea right now.  It is certainly a popular thesis on X.

This saga is only beginning, and I expect that it will be a key topic of conversation for a while, at least until we see a substantial move in yields from the current level.  It is interesting to note, however, the difference in attitude from Chairman Warsh, who explained the market was doing the Fed’s job for them by pushing up yields thus tightening policy, and Secretary Bessent who continues to say that yields don’t represent fundamentals.  Of course, both sides are talking their respective books, so say what they need to say.  Part of me thinks they have dinner together and laugh over how they are confusing markets.

Let’s start our market descriptions with gold (+1.7%) this morning as it is extending its rally of the past two weeks.  A look at the chart below shows the trend line lower from the peak in late January (the date Kevin Warsh was named Fed Chair) was broken on August 6th and has been driving higher since, up 8% since that day and more than 15% since the low print on June 30th.

Source: tradingeconomics.com

Silver (+2.3%) and copper (+2.1%) are also rallying here as there is a growing skepticism about financial assets and it appears investors are looking for things that are not reliant on government promises to retain value.  While I rarely discuss Bitcoin, that has rallied nearly 25% this week on largely the same story, although it has also benefitted from additional Treasury regulations being promulgated as part of the GENIUS Act and hopes for the CLARITY Act to pass soon as well.  Interestingly, BTC bottomed on June 30th as well.

Source: tradingeconomics.com

As to oil prices (+0.35%) they are creeping higher this morning as the ongoing Iran situation remains unresolved with no end in sight.  A key piece of news, that hasn’t gotten that much attention, is that the UAE has completely shut off all trade with Iran after two of its ships were attacked in the Gulf.  This matters hugely for Iran as the UAE was a significant trade conduit in things like machinery and equipment, as well as food and other necessities.  This will help the US sanctions regime significantly.  In fact, yesterday, Iranian Minister Ghalibaf, in a meeting in Baghdad explained that if the economy suffers further, that will be a major problem for the military and the nation.  Maybe this is going to end sooner than later after all.

If we turn to the bond market, while Wednesday saw a sharp decline in yields, yesterday saw that reverse, as per the chart at the top of the note and this morning, yields are unchanged from yesterday’s close.  That is true in the US and across every European market.  It feels like investors are waiting for the next piece of information.  The exception here is JGBs (+4bps) where yields rose after inflation data was released at 1.9% (1.8% core) as expected, but trending higher again as government efforts to mitigate the impact of higher energy prices are starting to falter.  As you can see in the chart below, though, the inflation regime in Japan has changed dramatically from the previous decades.

Source: tradingeconomics.com

In the stock markets, yesterday’s US performance was pretty crummy (a technical term), with declines on the order of -1% across all major indices.  But that did not follow through so much in Asia (China +0.6%, HK +1.2%, Korea +0.9%, Taiwan +0.65%) although the Nikkei (-0.3%) did lag.  Nor did it have an impact in Europe, although other than Spain (+0.7%), the other major markets are higher by about 0.1% only.  And US futures this morning are in the green, +0.5% across the board, at this hour (7:30).  A key part of yesterday’s US declines was a disappointing earnings report for Walmart, where although they beat earnings, their forecasts going forward were softer.

Finally, the dollar is under further pressure this morning, falling against almost every major counterpart with some substantial declines.  For instance, commodity currencies (AUD, NZD, NOK, ZAR) are all firmer by about +0.7% this morning following their local commodity strengths higher, although CLP (-0.1%) is an outlier here.  But we are also seeing strength in the EUR (+0.25%), GBP (+0.2%), JPY (+0.3%) and CAD (+0.35%) from the G10 bloc and similar gains from EMG currencies (MXN +0.3%, PLN (+0.4%), HUF (+0.6%) and the biggest gainer, KRW (+0.7%) which continues to benefit from capital inflows as well as repatriation by SK Hynix after the US IPO.  If we use the DXY (-0.25%) as our proxy the recent downtrend also started at the end of June as per the below chart.

Source: tradingeconomics.com

Two things here.  First, despite this decline, the dollar remains right in the middle of its longer-term range and until we break below 96.50 on the DXY, I do not believe the day-to-day movement indicates much.  Second, though, and more importantly, the FX markets are typically the release valve for pressures in a given economy, as no government can control capital flows, the exchange rate and monetary policy simultaneously, as pointed out by Robert Mundell in 1960 and 1963 (the so-called impossible trinity).  In this case, if the US continues to struggle with the debt situation, or else decides to head down the YCC road for real (meaning the Fed caps yields and buys whatever bonds necessary to do so), the dollar will suffer dramatically and likely boost inflation.  But we are a long way from that situation I believe, and it will take time to get there, if that is the direction.

On the data front, I would be remiss if I didn’t mention the Philly Fed’s blowout number of 47.4 yesterday with the manufacturing sector the biggest beneficiary.  This morning all we see is Flash PMI data (exp 53.9 Mfg, 54.0 Services) although with both the Philly and Empire State readings so strong, I wouldn’t be surprised to see a much stronger read here as well.

And that’s it for the week.  Certainly, it was more exciting than anticipated given the Treasury/Bessent announcement, but until we see just how many bonds they buy in a few weeks, we really don’t know how things will play out.  In the meantime, earnings have continued to be strong generally, and I see no reason for risk assets to decline for now.  The dollar, however, is starting to look a little shaky, and if we see a bit more of a fall, I might get concerned.

Good luck and good weekend

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Just a Ruse

Posted on by 
Said Scottie, since Congress keeps spending
And frankly, it seems never-ending
We’re going to buy
More bonds as we try
To stop yields from keeping ascending

The market response to this news
Was instant, as it did infuse
A bid to all risk
With movement quite brisk
Though skeptics claim it’s just a ruse

Boy, I leave you alone for one day and look what happens!

At 8:33 yesterday morning, the following announcement hit the US Treasury website [emphasis added]:

Treasury Announces Increased Sizes of Nominal Long-End Liquidity Support Buybacks Beginning September 9

WASHINGTON, D.C. —The U.S. Department of the Treasury is increasing, by at least double, the size of liquidity support buyback operations for longer-dated nominal coupon securities (the 10-year to 20-year sector and the 20-year to 30-year sector).  The current maximum size of $2 billion per operation will be at least $4 billion per operation. 

This change is effective September 9, 2026 and will be in effect for the remainder of this refunding quarter (through November 4, 2026).  Treasury will provide more information about future buyback sizes at the next Quarterly Refunding, scheduled for November 4, 2026. 

This increase in buyback operation sizes reflects Treasury’s desire to provide greater liquidity support in longer-dated nominal sectors where there is consistent strong sponsorship from market participants, as evidenced by the significant volume of high-quality offers Treasury routinely receives in longer-dated buyback operations.

An updated tentative Treasury buyback schedule will be released at a later date.

First, here is a picture of the market reaction in the DXY and gold, the two things that responded most aggressively.  (I inverted the scale for the DXY, so it fell on the news.)

Source: tradingeconomics.com

And here is the bond market response with that gap occurring between 8:30 and 8:35.

Source: tradingeconomics.com

Obviously, this was a big deal, right?  Well, that’s a good question and one worth discussing.  As a baseline, the size of the current program that they are doubling is a maximum of $2 billion per operation, which means that the new limit is at least $4 billion per operation.  Now, while an extra $2 billion of demand is nothing to sneeze at, we must consider how much of that debt is currently outstanding.  According to Claude, which took the data from the Treasury website, there is about $3.7 trillion of debt that currently has between 10 and 30 years left to maturity, held by private investors.  When adding the intragovernmental holdings and the Fed, that number appears to be about $5.4 trillion.  

There are seven more of these operations planned before the November deadline, so they will be purchasing an additional $14 billion of notional value, probably paying about $8 billion in cash given it all has much lower coupons so trades at a steep discount to par (and funding it by issuing T-bills).  And if we do the math, that means they will have absorbed (assuming the smaller outstanding of privately held debt) 0.38% of the notional.  

The caveat here is the ‘at least’.  Arguably they could buy any amount and stay within the confines of the announcement and that would certainly have a much larger impact.  But everything I have read is focused on the extra $2 billion.

With that in mind, and while I’m just an FX poet, my long experience in markets tells me that removing 38 basis points worth of some security or asset from a market is unlikely to have a major long-term impact on the supply/demand balance given there is real elasticity here.

So, while yesterday’s moves were certainly impressive (gold +4.3%! as an example) I might contend that the movement was based on the narrative rather than the actual market impact.  But the one thing we have learned of late is that the narrative matters.

Many in the market have immediately claimed that this is an act of desperation as Secretary Bessent seeks to drive longer end yields lower.  Others have claimed that this is the beginning of Yield Curve Control (YCC), although the fact they are issuing more T-bills to buy the bonds makes it a lot more like Operation Twist, when the Fed did the same thing, sold the front of the curve to buy the back, thus maintaining the same size balance sheet but removing duration from the market.  If this were YCC, they would need to print more money to buy those bonds, and the Treasury cannot do that, only the Fed can and they are not part of the process.

Here’s what I know, Scott Bessent is a very smart guy, and somebody who understands markets better than any Treasury Secretary since Bob Rubin and maybe better, certainly better than you or I.  I also know he has been dealt a very bad hand; 2,3,5,7,8, off-suit in poker terms, so doesn’t have many good options.  And I know that he has zero control over spending amounts which falls to Congress and the President, with him merely implementing the spending, not deciding how much to spend.  I don’t know if this will be effective beyond yesterday’s market movement, but if he is able to get the narrative moving in the right direction, (i.e. there is a reduction in duration available to the market so prices there should rise and yields concomitantly fall), it may offer some more breathing room.  The fact that he is using the tools available to manage the government’s balance sheet is a huge positive.  I can only say, good luck Scott.

While there are probably other stories of some import, this was the one that got the most engagement, and I think the one with the potential longest-term impacts on things.  So, let’s see how other markets responded.  It was interesting to me that the equity markets did not wholly embrace this action, although there was an initial rally, much of it faded by the end of the session with very modest gains at the end of the day.  Asian markets, however, fared very well with Tokyo (+1.4%), China (+0.1%), HK (+0.8%) and Korea (+5.9%!) all rallying and taking almost the entire region higher.  I think it is worth showing a chart of Korea’s KOSPI to demonstrate the increase in volatility we have seen on a regular basis there since the Iran war began.  Just look at the expansion of the daily ranges, especially since May, compared to the size of those bars for the prior six months.  This is another indication that the way things were is no longer the way they are.

Source: finance.yahoo.com

In Europe, though, equity price action is desultory this morning, with modest declines of about -0.4% or so across all major markets with Spain (-0.1%) the outlier.  As to US futures, at this hour (7:15), they are edging lower led by the NASDAQ (-0.5).

In the bond market this morning, yesterday’s euphoria is being tempered with Treasury yields backing up 3bps.  European sovereigns, though, are little changed to +1bp, although they didn’t respond to the Treasury market in any real sense yesterday.  That makes sense since Bessent’s announcement was highly US specific.  As to JGB yields, they did slip -4bps overnight, and there are many who draw a direct link to Treasuries and USDJPY, with official efforts by the US to cap both of those things.

Speaking of the yen (-0.3%), it was one of the largest beneficiaries of the announcement, rallying nearly 1% as you can see in the chart below.  However, this morning it is slipping a bit, and frankly, the post-intervention pattern has not been altered by yesterday’s move.

Source: tradingeconomics.com

In fact, most currencies rallied yesterday on the news but this morning, the picture is more mixed as we see both gainers (GBP +0.2%, EUR +0.15%, NOK +0.15%) and laggards (INR -0.25%, SEK -0.3%, ZAR -0.35%).  In essence, while yesterday’s moves were large and broadly dollar lower, this morning there is more nuance.  As it happens, the DXY (-0.1%) is edging lower today, but remains directly in the middle of that long-erm 96.50 / 100.50 range at 98.71.

Source: tradingeconomics.com

Finally, commodity prices show oil (+3.1%) continuing its recent rebound and back to its highest level in about a month.  But if I look at the chart below, it remains in the middle of its much wider range as well, if anything somewhat closer to the bottom than the top.  At this point, it is impossible to know what is happening in the Gulf war and frankly, I think market participants who don’t trade oil directly, have moved on to other drivers.  

Source: tradingeconomics.com

As to the metals markets, after yesterday’s remarkable rallies, it ought not be that surprising that they are consolidating this morning (Au -0.7%, Ag -0.3%. Cu -1.1%).  There are some analysts who believe that copper is getting set to roll over and decline in price as the narrative about shortages of supply for ever increasing data center and power production demand grow long in the tooth and may already be priced in.

On the data front, yesterday’s Minutes showed that there were non-voters who also would have been inclined to raise interest rates back in July, but we know that we have seen softer data since that meeting, so it is unclear if that is still the case.  As well, EIA oil inventories rose again, >4 million barrels, so tank bottoms are still covered!  This morning we get the weekly Initial (exp 210K) and Continuing (1790K) Claims as well as Philly Fed (25.0) and Leading Indicators (+0.1%).  There are still no Fed speakers, and I continue to believe that Chairman Warsh’s speech next week is the most important thing on the horizon.

Until then, I imagine yesterday’s surprise announcement is the biggest news we will get for a while and that we are likely to see markets return to their somnolence.  But there is a new narrative forming, the US is going to ignore inflation and push rates lower, which if it is followed implies higher commodity and equity prices and a falling dollar.

Good luck

Adf

Doomsters to Press

Posted on by 
The Payrolls report was a mess
But job losses added no stress
And so, once again
We’re back to the yen
As reason for doomsters to press

The claims being made are dramatic
Describing T-bonds as asthmatic
Explaining that Scott
Has now lost the plot
While calling his viewpoint erratic

So, what’s really happening here?
Is it true the end point is near?
I’m happy to say
Those fears I’d allay
At least through the end of next year

Once upon a time, a very smart economist, Larry Kantor, explained to me that the best signal for the economy to follow over time was the Unemployment Rate.  When it was falling, it was a strong indication that economic activity was increasing and vice versa.  But I think that is a world which no longer exists.  I make that point because Friday’s NFP report showed that the Unemployment Rate fell to 4.1% despite the fact the payrolls shrank.  Below is a chart of the Unemployment Rate since 1947 along with the average (5.7%) during that period.  The data comes from FRED although I calculated the average

Arguably, the first thing you notice is that the current Unemployment Rate is quite low relative to history, in fact it is in the bottom quintile.  But Mr Kantor’s observation was based on the then prevailing, and historical thesis of steady population growth, a thesis that has been called into question lately.  Between the aging of the population and the significant changes in immigration activity (i.e. the 2 million or so deportations recently), it is not clear that a declining Unemployment Rate is indicative of strong economic activity.  It could simply be a signal that the population is falling more quickly than job growth.

But looking at the report as a whole, it was quite confusing.  While Payrolls decline by -23K, Private Payrolls rose 30K and Manufacturing Payrolls rose 5k.  A shrinkage in government jobs seems quite positive to me.  However, Earnings data was a bit soft falling to 3.2% Y/Y, lower than the inflation rate.  Net, it is hard to draw many conclusions from the report although we did see the Fed fund futures market reduce the probability of a September hike to 56% from 66% prior.  Certainly, on the surface it hardly strikes that this is encouraging a rate hike.  And the stock market was non-plussed, rallying across the board.

Which takes us to the other story that continues to garner huge amounts of attention, the yen and the rationale behind the US joining Japan to intervene as well as what that will mean going forward.

I will try to boil this down.  The angst is attached to the carry trade, which, neatly defined, is borrowing JPY and paying a very low interest rate, converting the yen into another currency, typically USD, although AUD, MXN and BRL are also popular, and then earning the higher interest rate in those currencies.  It can be a highly profitable trade when currency volatility is low as the trader simply earns the difference between the interest rates each day.  The risk is there is a sudden move in the FX rate which can wipe out weeks or months of carry.  Hence the concern over intervention when we see the FX rate move 5% in a day like the end of July.

Estimates of its size run from $500 billion to $1.5 trillion, although nobody really knows.  I would err on the high side.  But there is another piece that is rarely discussed but I think must be considered in this conversation, and that is the outward investment flows from Japanese investors around the world, again largely to the US, but elsewhere as well.  I asked Grok to create a chart of net investment outflows from Japan from 2000 to present and got this:

Other than 2022, when the Fed started hiking rates aggressively and bond prices fell sharply, it has been pretty consistent.  The net amount of outflow over this time period is approximately ¥347.5 Trillion (again according to Grok) which at the average FX rate over the period of 112.40 works out to about $3.1 Trillion, arguably much more than the ‘pure’ carry trade.  But I don’t believe you can ignore that as if the Japanese are going to bring money home, it will be there as well.

Of course, there is no indication that is what they are doing at this point, despite all the hypotheticals about that being the major risk.  The Fiscal situation in both the US and Japan is awful, with both nations running huge budget deficits and showing no signs of changing that.  Inflation has been rising in both nations and a key prescription by many is that both central banks should be raising interest rates.  Of course, if the Fed raises and the BOJ waits, that widens the differential and will theoretically put more pressure on the yen.

The key concern and the favored story as to why the US helped Japan is that they didn’t want the BOJ to have to sell Treasuries to fund their USD sales.  Much has been made of the fact that the US sold EUR, not USD, but that is because the Treasury doesn’t keep USD in the Exchange Stabilization Fund, just EUR and JPY and a bit of some others like GBP, so they sold what they had.

The big fear is that the US cannot afford for Treasury yields to go higher (although it seems these same folks are clamoring for the Fed to hike rates) and so will do all they can to prevent that.  Now, the funny thing is that if you are Japanese and you own USD assets, you are thrilled with the weak yen as it enhances your return.  While Takaichi-san doesn’t like the weak yen as it exacerbates inflation, I don’t think Japan’s asset holders are clamoring for a strong yen. Remember this, too, that the long-term average yield on US 10-year Treasuries is 5.81%, more than 100bps above where we are today.  It is fair to say that recent lower yields are the exception, not the rule.

To my eye, the harder needle to thread in this process is for Japan, which really doesn’t want to see its massive foreign investment decline in value, although they are concerned about inflation.  For the US, while the fiscal situation is a major problem, it remains a problem for the future.  I’m pretty confident everybody in the world will still accept dollars for payment if they are offered.  The dollar is not going to collapse, nor is the bond market.  While pressure continues to build over time, it is going to take a LONG time.  Mark my words.  The end is not nigh!

In the meantime, JPY (-0.7%) looks like it is repeating the pattern after the last intervention attempts as per the below chart.  As I have maintained, unless there are policy changes, a strong yen is not coming soon.

Source: tradingeconomics.com

Speaking of the FX market writ large, this morning has seen very little net movement across almost all counterparts with KRW (-0.7%) the only other currency moving more than 0.1% in either direction.  We have discussed the won several times recently and while the alleged proximate cause for this decline is increased uncertainty over the Strait of Hormuz, given the huge gains seen in the past 6 weeks, this is nothing more than a blip in a strong trend.

In fact, lack of movement aptly describes the bond market as well with yields on Treasuries and across all European sovereigns within 1bp of Friday’s closing levels.  Apparently, fears of the apocalypse have been put on hold for the moment.

In the equity market, Friday’s US rally has seen a general follow-on by both Asia and Europe.  Overnight saw modest gains in almost every Asian market (Tokyo +2.1%, China +0.2%, HK +1.1%, Korea +0.7%, Taiwan +1.6%, etc.) although Australia (-0.3%) managed to buck the trend.  Given the resource focus of the Australian economy, and the recent gains in metals prices, that is a bit of a surprise.  As to Europe, Germany (+0.4%) is the leader of the pack with both France and Spain basically unchanged while the UK (-0.3%) lags slightly, albeit lacking any new news.  US futures are essentially unchanged at this hour (6:45).

Finally, oil prices (+1.4%) are firmer this morning as the ongoing saga over the Strait remains cluttered with confusion as to if a deal is coming close, or not and what role, if any, the US is going to play.  Personally, I’m ready for the US to exit the area, but they don’t ask me.  As to the metals markets, gold (-0.1%) is consolidating after a very strong performance last week, rising 7%, and silver (+0.8%) is continuing last week’s gains.  But to me, copper (+0.5%) is the metal with the most upside as the supply/demand characteristics of the market, (not enough is mined to satisfy annual needs and the timeline to bring a new mine up to speed exceeds a decade), imply higher prices still despite the fact we are already at record levels.

And that’s all.  We have no data today although CPI comes Wednesday.  I will look at data tomorrow as I have already gone too long this morning.

Good luck

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Investors Are Troth

Posted on by 
The doom mongers are up in arms
As though they raise many alarms
Investors don’t care
And add risk with flair
Ignoring the much-mooted harms

So, war is no longer concerning
And though hyperscalers are burning
Through all of their cash
Amid much backlash
Investors, their shares, are still yearning

And what about data and growth?
Investors care naught about both
Concerns about yen?
Not that trope again!
To stocks most investors are troth

As I read through my X feeds in the morning, as well as the WSJ and Bloomberg, the overriding theme appears to be the end is nigh.  Whether discussing Iran and the oil price and the future of the Strait of Hormuz, AI and the bubble or the potential for massive job losses and the creation of Skynet, the economic data and the incipient recession coming because people cannot afford to continue their consumption habits, or the idea that we are on the precipice of a Treasury bond market collapse because the Japanese yen is weak, the dominant theme is disaster is around the corner.  It is really tiresome, I have to say.

Now, you might say that I simply follow the wrong people, and that may be true, but my feed hasn’t changed, and I never look at the algorithm’s selections for me, I only look at my followings.  So, I cannot tell if people have become that much more bearish on the overall situation, or if they simply write these things because they believe they will get more engagement.  I fear it is the latter, but that simply devalues anything useful they may have to say.  Mostly, it’s frustrating to try to get an unbiased sense of what is happening in the world these days.  After all, while I understand that governments put out propaganda constantly, I thought the idea behind X and Substack was you could avoid that.  I think I am going to go back to reading books!

So, as we await this morning’s payroll report, I’ll try to touch on the key issues I believe matter.  Starting with the yen, which continues to garner attention, or more accurately, the joint intervention garners attention, I first have to laugh at the following Bloomberg headline, “Yen Surrenders Nearly Half Its Gains From US-Japan Intervention”.  This was written by Mia Glass, and I don’t know anything about her except her grasp of arithmetic is tenuous.  Here is the chart of USDJPY and while the yen has been weakening steadily since the intervention last week, half?  Even taking the spike low into account, we are nowhere near a 50% retracement and on a closing basis, it is a ridiculous claim.

Source: tradingeconomics.com

There continues to be much fodder made about Secretary Bessent trying to prevent a meltdown in the Treasury market but Occam’s Razor tells me that it is far more likely that a too-weak yen is bad for Japan because of its inflationary impact and the US because it impedes US exports so joint intervention made sense.  And as I have maintained all along, unless underlying fiscal and monetary policies change, the yen is going to continue to weaken.

Turning to Hormuz, the press continues to write with glee about President Trump’s miscalculation and the US losing the war and whether Iran and Oman are going to come to some agreement on the Strait, but oil prices, while they rallied a bit yesterday, are lower this morning by -0.6% and -9.25% in the past week.  Looking at the chart below, despite all the discussion of inventory depletion, which are real, but obviously not as important to the price as many previously believed, the trend remains downward and we are well below the trend.  Frankly, at $75/bbl, it appears the world works fairly well.

Source: tradingeconomics.com

Look, I would rather pay less for my diesel, and I know you would all like to pay less for your gasoline, but here’s a 20-year history of the RBOB (NYMEX gasoline) contract.  We are hardly in unprecedented territory having spent a lot of time around here from 2011 through 2015 as well as the beginning of the Russia/Ukraine war.

I have no idea how things will end up in Iran, nor does any other commentator.  I know I am happier if Iran does not have a nuclear weapon and ballistic missiles that can reach Europe, let alone the US.  But I would say the market has almost lost interest in the war.

As to the hyperscalers and the AI bubble, in truth, it seems much of the animosity has been turned toward SpaceX as everyone loves to hate Elon almost as much as they love to hate Trump.  But it appears by many metrics that equity markets continue to benefit across the board from strong earnings results, with ~85% of companies (depending on your source) beating estimates which is well above the average of 77%.  So, the economy continues to grow pretty strongly, and companies continue to make money, and investors continue to want to buy shares.  The hyperscalers aren’t leading the pack anymore, but they have not collapsed either.  There are many who continue to explain this cannot go on forever and there will be a reckoning, and they may well be correct, but in this case, being early and being wrong are the same thing.

Ok, enough of that.  Let’s see if anything noteworthy has happened overnight.  The truth is, not especially.  Asian shares were mixed with Chinese shares doing well after solid trade data, but the rest of the region drifted lower.  European shares are firmer across the board after broadly positive data (German IP and Trade, French Trade) although the French Unemployment Rate ticked higher to 8.3%.  And US futures are higher this morning as well ahead of the NFP report.  Despite the doom and gloom, equity markets are doing fine.

Bond markets have barely moved overnight, although we did see Treasury yields back up 5bps yesterday.  That appears to have been on the back of the oil price rise, although as I look at probabilities of central bank rate hikes, there is a growing belief that the Fed, ECB and BOJ are all going to raise rates next month as hiking rates into an energy shock seems to be their MO.

Source: rateprobability.com

We discussed oil but gold (+2.0%) and silver (+4.1%) are the real story in commodities as both are extending their recent rallies from the consolidation lows.  For instance, silver is higher by 11% this week and $9/oz since July 17th.

Source: tradingeconomics.com

Finally, the dollar, despite all the anxiety about the yen, remains quiet overall.  The DXY is below 100, back in its range and showing no inclination to move in either direction.  This morning ZAR (+0.7%) is the king of the hill on the rally in gold while MXN (+0.3%) is a touch higher after Banxico left rates on hold.  But remember, peso rates are still high and economic growth continues apace so investment opportunities abound.  The peso has strengthened more than 17% since the beginning of 2025, shaking off any tariff concerns easily.

Source: tradingeconomics.com

As to the data, here are consensus forecasts:

Nonfarm Payrolls80K
Private Payrolls78K
Manufacturing Payrolls4K
Unemployment Rate4.2%
Average Hourly Earnings 0.3% (3.5% Y/Y)
Average Weekly Hours34.3
Participation Rate61.6%

Source: tradingeconomics.com

We also see Canadian employment data (exp 6.5% Unemployment Rate) and hear from Thomas Barkin, the Richmond Fed president.  But it is a summer Friday and typically, about an hour after the NFP release, traders are gone for the weekend so don’t expect too much today.

The world is not ending, the dollar is not collapsing, the Treasury market is not collapsing, and equity markets are not about to implode.  My take is the big stories from the past months have lost their luster and I suspect after a lull, we are going to start to focus on the politics of the midterm elections in November.  But until then, have a cold one and relax.

Good luck and good weekend

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