Tag Archives: stocks

Monet’ry Bleating

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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

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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

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In Tears

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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

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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

Adf

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

Adf

Why People Screech

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

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

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

Source: tradingeconomics.com

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

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

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

Wall Street bankers’ bonuses set for significant rise

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

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

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

Source: tradingeconomics.com

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

Source: tradingeconomics.com

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

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

Source: tradingeconomics.com

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

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

Good luck

Adf

Far From Dead

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Source: tradingeconomics.com

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

Source: tradingeconomics.com

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

TodayGoods Trade Balance-$100.0B
 Case-Shiller Home Prices1.3%
 Consumer Confidence92.3
WednesdayFOMC Decision3.75% (unchanged)
ThursdayBOE Rate Decision3.75% (unchanged)
 Initial Claims200K
 Continuing Claims1800K
 Q2 GDP2.1%
 Personal Income0.3%
 Personal Spending0.3%
 PCE-0.1% (3.7% Y/Y)
 Core PCE0.2% (3.3% Y/Y)
FridayBOJ Rate Decision1.0% (unchanged)
 Employment Cost Index0.8%
 Chicago PMI56.0
 Michigan Sentiment 54.0

Source: tradingeconomics.com

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

Good luck

Adf

Quite Spicey

Posted on by 
Though Friday things looked pretty dicey
With tech stocks then seen as quite pricey
New word that the bombing
Has ended was calming
And stock markets opened quite spicey

Of course, it can be no surprise
That oil’s now well off its highs
The dollar is slipping
Though yields are just dripping
As bond traders still agonize

President Trump changed his mind about continuing the recent bombing campaign against Iran over the weekend amid questions about alleged US munitions supplies.  But whatever the reason, this was music to the risk markets with oil (opening -6.4%) falling sharply while equity futures (NASDAQ opening +1.25%) rebound from last week’s declines.  Once again, headline risk remains the biggest risk there is in markets.  Note the huge gap lower in the oil market early Sunday evening in the chart below from tradingeconomics.com

At this point, it is a fool’s errand to try to estimate where oil prices are heading going forward as the next headline is likely to be the key driver, and that is a complete unknown.

So, let’s turn our attention to some more fundamental questions that have been brewing in the background and are pretty complex.  I want to start with a remarkable Substack piece I read this weekend which had a completely different perspective on the AI investment thesis than anything that I have seen anywhere else.  And it is quite a persuasive piece.  While I have linked it above, it is quite a long read, so the highlights are as follows:

  • The AI boom is not a tech boom; it is a credit driven real estate cycle
  • This is virtually identical to the run-up to the subprime housing crisis and GFC
  • The key to understand is the second derivative of growth, acceleration.
  • GroundBreaker’s (the author) thesis is that the second derivative on AI valuation has already rolled over and the future for AI stocks is pretty bleak, at least in the medium term.

Below are two charts from his Substack to help describe the issue:

This is a basic description of the movements of the underlying (blue line), its velocity (growth rate, yellow line) and its acceleration (the change in its growth rate, red line).  As you can seem growth can still be increasing, but at a slower rate, and that’s the problem he highlights.  

Below is a chart of OpenAI’s valuation metrics (remember it’s private so the values are episodic, not continuous, but the point is if the change in the rate of growth of the valuation metric starts declining, that is the break where things become a problem, i.e. they may not be able to finance their projected growth going forward.  

And as you can see, it is already heading lower.  This does not speak well to the future for OpenAI, and I would argue, the entire space, as many have made the case this is all Ponzi finance, meaning the funding cannot be repaid on cashflows, only on increasing valuations.  

Now consider the subprime crisis where the problems started when the rate of housing price increases rolled over and all those 2-year teaser rates could no longer be financed at higher valuations.  That’s when they all went bust!  Here’s the thing; the 2nd derivative rolled over in late 2006, the first hiccups didn’t happen until mid-2007 with SocGen closing some funds, Lehman didn’t go bust until September 2008 and the equity market didn’t bottom until March 2009.  It can take a long time for this to play out, but beware the cycle, it could well repeat in AI linked investments.

So, there’s that to consider.

The other thing that I’ve been pondering is gold and its meaning within the financial markets.  Unlike the AI discussion above, I want to discuss two very real sides to this story.  On the one hand, the ongoing destruction of the value of fiat currencies by all major central banks’ policies is real.  Money continues to get printed and inflation continues to rise debasing those fiat currencies.  Adding to the problem is the massive government debt issuance which, if history holds, will be sopped up by those very same central banks, adding to the debasement.  The search for a neutral reserve asset to replace US treasuries is real, but the transition will take a very long time, in my view.  However, all this speaks to increased demand for the barbarous relic, and when that is priced in declining fiat currencies, a higher price.  I think it’s a very strong argument and has been made by many, including this poet.  After all, gold is often thought of as the ultimate inflation hedge.

So, what is the flipside?  As I have written frequently regarding oil prices, we cannot ignore the market pricing and what it is telling us.  Understand that I have been a gold bull for a long time and strongly believe in the long-term debasement concern.  But as a long-time trader and market participant, it is very difficult for me to look at the below, long-term chart of gold and not think that there is a much further decline on the cards.  Parabolic moves, historically, do not resolve by trading sideways for extended periods of time, they fall back… a lot!

While we have recently seen several parabolic moves in market prices, notably the NASDAQ and KOSPI, I want to highlight the last time the NASDAQ had a parabolic move, during the tech bubble in 1999-2000.  The chart below is a logarithmic chart of the QQQ ETF.  As you can see back in 2000 – 2002, it fell a very long way after the bubble burst, some 88%, a much larger move than during the GFC!  

There is one other trading market, that while many may dismiss its meaning, I would contend is very representative of the way markets behave across all asset classes, Bitcoin.  The below chart shows it from its beginning, and you can see a number of essentially parabolic moves higher, each resolving with a decline of at least 50% and at times more than 70%.

Source: coinmarketcap.com

My point is that gold shows all the signs of having peaked for a while, and it has ‘only’ fallen some 25% from its highs.  From a trading history perspective, there is nothing that would seem to prevent a move down to $2800/oz or so, a 50% retracement from the high.  

So, which is it?  As I remain long gold in the personal portfolio, I have been a beneficiary of the long climb higher and would love to see it continue.  And there is much to be said for the debasement theory.  But both sides of this argument can be correct with the time frame the key differentiator. We could see a further short-term decline before a renewed upward move of significant magnitude.  Much will depend on how global macroeconomics and economic statecraft plays out over the coming months/years.  And this is why trading is hard!  One last thing describing just how much things have changed regarding gold and sentiment around it, this headline in Bloomberg this morning is remarkable, Gold Climbs as Pause in Mideast Fighting Curbs Inflation Risk.  

Ok, sorry for my rants, but a brief tour of markets show things are exactly as you would expect based on the reduction of tensions in Iran. Equity markets are higher around the world as per the below tradingeconomics.com screen shot, and don’t be fooled by Brazil, it hasn’t opened yet and there are no futures, so that was Friday’s performance.

As to bond yields, they too, are lower across the board as per the below Bloomberg.com screenshot.  Canada, Mexico and Brazil markets are not yet opened, hence the lack of movement.

Oil has fallen further than when I started writing last evening with WTI (-8.2%) and Brent (-9.7%) both sharply lower.  Regarding Brent, apparently there has been a resumption of flows through Kazakhstan which is helping even more there.  Metals are higher (Au +1.1%, Ag +2.2%, Cu +0.9%), which is keeping with the latest theme.  And finally, the dollar is broadly softer, as also would be expected given the movement in other markets.  The two key exceptions here are NOK (-0.7%) which is clearly a reaction to the movement in oil prices and KRW (-0.8%) which actually started the session much stronger but has reversed.  While I read a rationale about concerns over a Fed rate hike, given the movement in oil and yields, that doesn’t seem right.  Rather, after a more than 6% appreciation over the course of the past 3 weeks, it seems more like a reflexive bounce in the dollar.

Source: tradingeconmomics.com

On the data front today, this morning brings Durable Goods (exp 2.5%, 0.8% ex-Transport) but that is all.  I will go deeper tomorrow, and remember, the FOMC meets this week with the current pricing 33% for a hike, even after the decline in oil prices today.  I remain in the no move camp but will discuss tomorrow.

And that’s more than enough.

Good luck

Adf

Out in the Cold

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

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

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

Source: tradingeconomics.com

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

Source: tradingeconomics.com

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

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

Source: tradingeconomics.com

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

Source: tradingeconomics.com

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

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

Source: tradingeconomics.com

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

Source: tradingeconomics.com

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

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

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

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

Good luck

Adf