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Voters Have Doubt

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In France, Monsiuer Bayrou is out
In Norway, though, Labor held stout
Japan’s been discussed
And Starmer’s soon Trussed
In governments, voters have doubt
 
Investors, though, see all this news
And none of them have changed their views
Just one thing they heed
And that’s market greed
At some point they’ll all sing the blues

 

Here we are on Wednesday and already we have seen two major (Japan and France) and one minor (Nepal) nations make governmental changes.  Actually, they haven’t really changed yet, they just defenestrated the PM and now need to figure out what to do next.  In Japan, it appears there are two key candidates vying to lead a minority LDP government, Sanae Takaichi and Shinjiro Koizumi, although at this point it appears too close to call.  Regardless, it will be rough sledding for whoever wins the seat as the underlying problems that undermined Ishiba-san remain.  

In France, President Macron has, so far, said he will not call for new elections, nor will he resign despite increasing pressure from both the left and the right for both measures.  He will appoint a new PM this week and they will go through this process yet again as the underlying issue, how to rein in spending and reduce the budget deficit, remains with nobody willing to make the hard decisions.  A side note here is that French 10-year OATs now trade at the same level as Italian 10-year BTPs, a catastrophic decline over the past 15 years as per the below chart. 

Recall, during the Eurozone crisis in 2011, Italy was perceived as the second worst situation after Greece in the PIGS, while France was grouped with Germany as hale and hearty.  Oh, how the mighty have fallen.

Nepal is clearly too insignificant from a global macroeconomic perspective to matter, but it strikes me that the fall of the PM there is merely in line with the growing unhappiness of populations around the world with their respective governments.

A friend of mine, Josh Myers, who writes a very thoughtful Substack published last night and it is well worth the read.  He makes the point that the Washington Consensus, which has since the 1980’s, underpinned essentially all G10 activity and focused on privatization of assets, free trade and liberalized financial systems, appears to have come to the end of the road.  I think this is an excellent observation and fits well with my thesis that the consensus views of appropriate policies are falling apart.  Too many people have been left behind as both income and wealth inequality in the G10 is rampant, and those who have fallen behind are now angry enough to make themselves heard.  

This is why we see governments fall.  It is why nationalist parties are gaining strength around the world as they focus on their own citizens rather than a global concept.  And it is why those governments still in power are desperately struggling to prevent their opponents from being able to speak.  This is the genesis of the restrictions on speech that are now rampant in Germany and the UK, two nations whose governments are under extreme pressure because of policy failures, but don’t want to give up the reins of power and are trying to prevent anybody from saying anything bad about them, thus literally jailing those who do!

And yet…investors are sanguine about it all!  At least that seems to be the case on the surface as equity indices around the world continue to trade higher with most major equity markets at or within a few percent of all-time highs.  This seems like misplaced confidence to me as the one thing I consistently read is that markets are performing well in anticipation of the FOMC cutting Fed funds next week, with hopes growing that it will be a 50bp cut.  

But if we look at the Treasury market, which has seen yields slide steadily since the beginning of the year, with 10-year yields now lower by 75bps since President Trump’s inauguration, it is difficult to square that circle.  

Source: tradingeconomics.com

Bond yields typically rise and fall based on two things, expected inflation and expected growth as those two have been conflated in investor (and economist) minds for a while.  The upshot is if yields are declining steadily, as they have been, it implies investors see slowing economic activity which will lead to lower inflation.  Now, if economic activity is set to slow, it strikes me that will not help corporate profitability, and in fact, has the potential to exacerbate the situation by forcing layoffs, reducing economic activity further.  Alas, it is not clear if that will drive inflation lower in any meaningful way.  The point is the bond market and the stock market are looking at the same data and seeing very different future outcomes.

Is there a tiebreaker we can use here?  The FX market might be one place, but the weakness in this idea is that FX rates are relative rates, not descriptive of the global economy.  Sure, historically the dollar has been the ultimate safe haven with funds flowing there when things got rough economically, but its recent weakness does not foretell that particular story.  Which brings us to the only other asset class around, commodities.  And the one thing we have seen lately is commodity prices continuously rising, or at least metals prices doing so, specifically gold.  Several millennia of history showing gold to be the one true store of value is not easily forgotten, and that is why the barbarous relic has rallied 39% so far in 2025.  

A number of analysts have likened the current situation to that of Wile E Coyote and I understand the idea.  It certainly is a potential outcome so beware.

Well, once again I have taken much time so this will be the lightning round.  Starting with bonds, this morning, yields in the US and Europe are higher by 2bps across the board, with one exception, France which has seen yields rise 6bps as discussed above.  JGB yields are unchanged as it appears investors there don’t know what to think yet and are awaiting the new PM decision.

In equities, yesterday’s very modest late rallies in the US were followed by a mixed session in Asia (Japan -0.4%, China -0.7%, HK +1.2%) although there were more winners (Korea, India, Taiwan, Thailand) than laggards (Australia, New Zealand, Indonesia) elsewhere in the region.  In Europe, mixed is also the proper adjective with the CAC (+0.4%) remarkably leading the way higher despite lousy IP data (-1.1%) while Germany (-0.4%) and Spain (-0.4%) both lag.  As to US futures, at this hour (7:20) they are marginally higher, 0.15% or so.

Oil (+0.8%) continues to trade back and forth each day with no direction for now.  I’m sure something will change the situation here, but I have no idea what it will be.  Gold (+0.5%) meanwhile goes from strength to strength and is sitting at yet another new all-time high, above $3600/oz.  While silver and copper are little changed this morning, the one thing that seems clear is there is no shortage of demand for gold.

Finally, the dollar is arguably slightly lower this morning, although mixed may be a better description.  The euro (-0.15%) is lagging but JPY (+0.6%) is the strongest currency across both G10 and EMG blocs.  Otherwise, it is largely +/-0.2% or less as traders ponder the data.

While CPI is released on Thursday, I think this morning’s NFP revision is likely to be the most impactful number we see this week, and truly, ahead of the FOMC next week.

TodayNFP Revision-500K to -950K
WednesdayPPI0.3% (3.3% Y/Y)
 -ex food & energy0.3% (3.5% Y/Y)
ThursdayECB Rate Decision2.0% (unchanged)
 CPI0.3% (2.9% Y/Y)
 -ex food & energy0.3% (3.1% Y/Y)
 Initial Claims235K
 Continuing Claims1950K
FridayMichigan Sentiment58.0

Source: tradingeconomics.com

As I type, the Fed funds futures market is pricing a 12% probability of a 50bp cut next week and an 80% chance of 75bps this year.

Source: cmegroup.com

If the NFP revisions are more than -500K, I suspect that rate cut probabilities will rise sharply with the dollar falling, gold rising, and bond yields heading lower as well.  Equity markets will probably rally initially, although it strikes me that this type of bad news will not help corporate earnings.  So, buckle up for the fun this morning on a release that has historically been ignored but is now clearly center stage.

Good luck

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Got Smote

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There once was a poet that wrote
‘Bout bonds and the fact they got smote
So, yields, they did rise
And to his surprise
Most pundits, this news did promote
 
Now turning to stories today
The biggest one, I’d have to say
Is how, in Japan
Ishiba’s grand plan
Has failed, thus he’ll be swept away

 

The number of stories this morning regarding the synchronous rise of long-dated bond yields around the world has risen dramatically.  While yesterday, I highlighted this fact, I certainly didn’t expect it to be the key narrative this morning.  But such is life, and virtually every news outlet is focusing on the subject as both a reason for the poor equity performances yesterday as well as a way to highlight government profligacy.  I do find it interesting, though, that the same publications that push for more spending for their preferred causes have suddenly become worried about too much government spending.  But double standards are nothing new.   A smattering of examples show Reuters, Bloomberg and the WSJ all feigning concern over too much government spending.

I say they are feigning concern because all these publications are perfectly willing to support excess government spending if it is spent on the things they care about.  Regardless, the fact that this has become one of today’s key talking points is evidence that some folks are starting to recognize that trees cannot grow to the sky.  Even though almost every major central bank is in easing mode, long-term yields keep rising.  Alas, the almost certain outcome here, albeit likely still well into the future, is some form of yield curve control as central banks will be forced to prevent yields from rising too high lest their respective governments go bust.  I expect that the initial stages will be regulations requiring banks and insurance companies, and maybe private, tax-advantaged accounts like IRA’s and 401K’s, to hold a certain percentage of Treasuries.  But I suspect that eventually, only central banks will have the wherewithal to prevent runaway yields.  Welcome to the future; got gold?

However, you can read about this everywhere, and after all, I touched on it yesterday so let’s move on.  Government stability/fragility is the topic du jour in this poet’s eyes.  We already know that the French government is set to fall on Monday when PM Bayrou loses a confidence vote.  It is unclear what comes next, but French finances are in bad shape and getting worse and they don’t print their own currency.  This tells me that we could see a lot more social unrest in France going forward given the French penchant for nationwide strikes.  

But a story that has gotten less press is in Japan, where PM Ishiba saw the LDP majority decimated in the Upper House two weeks ago and is now heading a minority government as the LDP does not have a majority in either house in the Diet.  One of the key members of the LDP, and apparently the glue that was holding together the fragile coalition was Hiroshi Moriyama, the LDP Secretary General, and he is now resigning along with several of his lieutenants, so it appears that Japan’s government is about to fall as well.  The upshot here is that the BOJ seems unlikely to raise interest rates given the political uncertainty, which is not only pressuring long-dated JGB’s but also the yen. (see chart below from tradingeconomics.com)

While I have not written extensively about the UK’s government, the situation there is quite similar, with massive fiscal problems driving yields higher while the government focuses on removing the right of free speech amongst its people if that speech is contra to the government’s policies.  While the next UK election need not be held for another 4 years, my take is it will be much sooner as PM Starmer has destroyed his legitimacy with recent policy decisions and will soon be unable to govern.  It will only be a matter of time before his own party turns on him.

The governments in Japan, France and the UK are all under increasing pressure as their policy prescriptions have not tackled the key problems in their respective economies.  Inflation in Japan and the UK and benefits in France need to be addressed, but it is abundantly clear that the current leadership will not be able to do so effectively.  Once again, please explain why people are so bearish the dollar, at least in the long run.  While inflation will be higher worldwide and fiat currencies will all suffer vs. real assets, on a relative basis, the dollar doesn’t appear so bad after all.

Ok, let’s move on to the overnight activity as it gets too depressing highlighting all the government failures around the world.  While US stocks closed above their worst levels of the session, they were all lower yesterday.  That bled into Asia with Japan (-0.9%), Hong Kong (-0.6%) and China (-0.7%) all falling with worse outcomes in some other parts of the region (Australia -1.8%, Philippines -0.75%) although there were winners as well (Korea, India, Taiwan) albeit in less impressive fashion.  Perhaps the surprise was Chinese underperformance after PMI Services data there printed at its highest level since May 2024.

But whatever the negativity that existed in Asia was, it did not translate to European shares as they are all higher (CAC +1.0%, DAX +0.8%, FTSE 100 +0.55%, IBEX +0.2%).  Now, clearly it is not confidence in government activity that has investors excited.  The only data of note was Services PMI, which was mostly as expected except in Germany where it fell to 49.3, far lower than the initial estimate of 50.1 and based on the chart below, seemingly trending lower.

Source: tradingeconomics.com

US futures, too, are higher this morning, with gains of 0.5% to 0.75% for the S&P and NASDAQ.

You won’t be surprised that bond yields continue to drift higher, even in the 10-year space with Treasuries higher by 2bps, although most European sovereign yields have edged down by -1bp in the 10-year space.  It is the longer dated yields that continue to see the most pressure with 30-year yields across the US, Europe and Japan all pushing to new highs for the move, and in the case of Japan, new all-time highs.

Source: tradingeconomics.com

This, of course, is the underlying story for virtually all markets right now.

In the commodity markets, oil (-2.1%) has given back yesterday’s gains after reports that OPEC+, which is meeting this weekend, will be raising their output yet again.  Whatever the situation is in Russia, whether Ukrainian attacks are reducing supply or not, it seems clear that OPEC is unperturbed and wants to pump as much as possible. In the metals markets, gold (+0.3%) has set another new all-time high and appears to be breaking out from its recent consolidation pattern.  I am no market technician (I’m a poet after all), but a consensus seems to be forming that $3700 is coming soon and $4000 will be achieved by early next year.

Source: tradingeconomics.com

The rest of the metals space is little changed this morning with silver holding at its 11-year highs and copper treading water at the levels that existed pre-tariff threats.

Finally, the currency markets, which saw the dollar rally sharply yesterday, are taking a breather with the dollar giving back some of those gains amid a consolidation.  In the G10, movement is 0.2% or less, so really nothing and in the EMG bloc, HUF (+0.6%), KRW (+0.5%) and ZAR (+0.3%) are the biggest gainers, with the latter following gold, while traders see the central bank in Hungary maintaining higher rates to fight still, too high inflation of 4.3%.  As to Korea, better than expected GDP data helped drive inflows to the currency.

On the data front today, we see JOLTs Job Openings (exp 7.4M) and Factory Orders (-1.4%) this morning and the Fed’s Beige Book is released at 2:00pm.  We also hear from two Fed speakers, which given the row over Governor Cook’s tenure at the Fed, may be interesting to see.  The market continues to price a 92% probability of a 25bp cut in two weeks’ time, but I suspect that Friday’s NFP data may be the ultimate arbiter there.

I cannot look at the world and conclude that the US is the biggest problem around.  However, if we do see weak data on Friday and the market starts to price 50bps of cuts by the Fed, the dollar will decline in the near term.  But longer term, the more I read, the more bullish I get on the greenback, at least relative to other currencies.

Good luck

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The Zeitgeist Could Shatter

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While crime throughout DC has dropped
And Trump’s Fed demands haven’t stopped
The story today
That really holds sway
Is whether Nvidia’s topped
 
The war in Ukraine doesn’t matter
Nor does if the yield curve is flatter
‘Cause stonks must go higher
And that does require
Good news, or the zeitgeist could shatter

 

Some mornings things just are not that interesting in markets despite the ongoing events happening around the world.  Arguably, the biggest headlines revolve around the remarkable decline in crime in Washington DC, which while most of the mainstream media decried the President’s actions at first, has grown in popularity, even amongst his foes.  From a market perspective, the number of stories and editorials written about President Trump’s efforts to fire Fed governor Lisa Cook has risen exponentially, with many still trying to explain the Fed will lose its independence if Trump is successful.  (Given they have not been independent since 1987, I would take this with a grain of salt).  The other noteworthy story is that the EU is going to fast-track legislation to remove all tariffs throughout the EU on US industrial good imports, one of the results of the trade negotiations.

But, while those may be of passing interest, the thing in markets that really has tongues wagging is the fact that Nvidia is set to release their Q2 earnings this afternoon after the equity markets in the US close.  I must admit, thinking back to the tech bubble in 2000-01, I do not remember any single company garnering the amount of attention that Nvidia gets these days.  Perhaps Cisco Systems is the closest analogy, but it was nowhere near this level of interest and excitement.  While this is an imperfect analysis, I think it is worth looking at the charts of both Nvidia and Cisco (from finance.yahoo.com) to help you see the magnitude of the rise in each case.  It is certainly not hard to draw the conclusion that Nvidia may be peaking.  After all, if it declines by 75%, it will still have a market cap > $1 trillion!

NVDA

CSCO

I think it is reasonable to ask whether AI is a bubble.  I also think it is reasonable to ask whether the so-called hyperscalers, Meta, Microsoft, Alphabet and Amazon, are spending too much on building out their AI platforms.  This would be the case if the promised revenues never materialize.  Certainly, other than for Nvidia, those revenues are paltry at best so far.  But these are all observations from a poet who doesn’t follow the stock closely and simply cannot avoid some of the story because it is so prevalent everywhere.  FWIW, which is probably not very much, my take is that history has shown that new innovations, e.g. the automobile, electricity, the internet, can have remarkably wide-ranging implications but usually take far longer to achieve those ends than equity investors assume.  In other words, the idea that the megacap companies are overvalued seems pretty compelling.

Enough of my amateur equity analysis, and I’m sorry, but that is all that seems to be of interest today.  So, let’s look at how markets have behaved overnight ahead of the news this afternoon.  After modest afternoon rallies resulted in higher closes in the US yesterday, Japan (+0.3%) followed suit as did Australia (+0.3%), but both China (-1.5%) and Hong Kong (-1.3%) fell sharply, reversing some of their recent gains as Chinese industrial profits fell -1.7%, a worse than expected outcome, and it seemed to have triggered some profit taking.  With that in mind, I have read a number of analysts who have become of the opinion that Chinese equities are setting up for a much larger move higher based on additional stimulus as well as the fact that Chinese interest rates are the lowest in the world right now (ex-Switzerland).  Elsewhere in the region, India (-1.0%) lagged alongside China and most of the others had much less movement in either direction.

In Europe, the picture is mixed with the CAC (+0.4%) the leading gainer which looks very much like a reaction to the past two sessions’ sharp declines.  Spain (-0.4%) is lagging, although there is no particular news, and Germany (-0.15%) is also softer after the GfK Consumer Confidence report was released at a weaker than expected -23.6.  As to US futures, at this hour (7:25) they are ever so slightly higher.

In the bond market, despite all the anxiety over the Fed and Trump’s attempt to remove Governor Cook, 10-year yields are higher by 1bp after falling 3bps yesterday.  European sovereign yields are lower by -1bp across the board and JGB yields are unchanged.  In other words, while the media’s hair is on fire, clearly the market’s is not.

In the commodity space, oil (-0.1%) is little changed this morning, maintaining yesterday’s declines which appear to have been a result of Russia seeking to export more crude after Ukrainian attacks on Russian refineries have slowed output.  Gold (-0.6%) which saw a strong rally yesterday is falling back a bit, but remains in that tight range I showed yesterday, although both silver (-0.9%) and copper (-1.3%) are under more pressure this morning, likely on the back of a stronger dollar.

Speaking of the dollar, it is firmer across the board this morning, rising 0.5% vs. the euro, yen and Aussie, with slightly smaller gains vs. the other G10 currencies.  In emerging markets, ZAR (-0.85%) is the laggard, not surprisingly on the back of weaker precious metals prices, but PLN (-0.75%) is also under pressure on a combination of the weak euro and concerns over the lack of progress in the Russia/Ukraine war.  Even CNY (-0.15%) is weaker despite a renewed belief that China is going to allow the yuan to strengthen as part of any trade deal.

There is no front-line data to be released today, with only EIA oil inventories expecting a modest net draw.  Richmond Fed president Barking speaks at 12:45 but given he just explained his views yesterday, that he didn’t foresee much change in rates at all given the current state of the economy, I cannot imagine he will have changed that view.

And that’s all we have today.  I anticipate a lackluster session in all markets as traders await the Nvidia numbers later.  Of course, President Trump could surprise us all with an announcement on Russia, the Fed, or any of a number of other situations, but those are outside my ability to anticipate.  The market is still pricing an 87% chance of a September cut and an 80% chance of two cuts by December.  If the Fed gets aggressive, for whatever reason, the dollar will suffer.  But that is not yet the case, so range trading seems the best bet.

Good luck

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A Thirst for Vengeance

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The talk of the town ‘bout the Fed
Was not what the Minutes had said
But rather the look
Into Lisa Cook
And whether the rules she did shred
 
It seems now both parties agree
That lawfare is how things should be
Impeachment was first
But now there’s a thirst
For vengeance ‘gainst your enemy

 

The FOMC Minutes released yesterday were not that informative overall.  After all, the two dissensions by Waller and Bowman have already been dissected for the past 3 weeks and reading through the Minutes, they basically said that most participants had no idea how things would play out.  They couldn’t decide if tariffs would be more inflationary, if the impact would be consistent or a one-off and so doing nothing felt right.  As to the employment situation, there too they had no clarity as to their thoughts, with some positing things could get worse while others thought the employment situation would be fine.  Anyway, with Powell speaking tomorrow, it was all old news.

However, the real Fed news came from the head of the FHFA, Bill Pulte, who revealed that he had forwarded information to the DOJ to investigate potential mortgage fraud by Fed Governor Lisa Cook.  In what has become something of a pattern, Ms Cook appears to have misrepresented the purchase of a secondary home she was planning to rent out as her primary residence in an effort to get a reduced rate on her mortgage.  This is remarkably similar to the case against NY Attorney General Letitia James as well as California Senator Adam Schiff.  While the latter two appear vengeful in that both of those two were instrumental in personal political attacks on President Trump, it is Ms Cook’s situation that may have the bigger impact.  If she is forced to resign, as has already been demanded by President Trump, then that opens another seat on the Fed for Mr Trump to fill.  Based on Trump’s current views, one would anticipate it would turn the Fed that much more dovish if that is the way things evolve.

Sitting here in the bleachers, I have no idea as to the veracity of the claims against any of these three, but it will not be a huge surprise to see charges brought in each case.  It will certainly be a sticky wicket for Chairman Powell if a Fed governor is brought up on charges of mortgage fraud given her role in monetary policy making.  At this stage, my working assumption is we will see all three served and cases brought against them.  If that is the case, we have to assume the Fed is going to become that much more dovish during the rest of the year regardless of the data.

Interestingly, one cannot look at Fed funds futures and conclude this will be the case as the probability of a rate cut next month has actually declined a bit further, now at 79% as per the below chart.  In fact, if you look at the recent history, you can see that just one week ago, that probability was 92% and the week prior to that it was over 100%.

Source: cmegroup.com

There is an irony in the idea that President Trump wants to see the Fed cut rates while describing the economy as doing great.  Arguably, if the economy is doing great with rates where they are, why change them.  The answer, I believe, is the administration’s goal to run the economy as hot as possible with the idea that faster growth in real activity will help overcome the debt problems.  Alas, part of running it hot means that inflation is unlikely to fall much further.  And that, my friends, is the conundrum.  A hot US economy will continue to draw investment and support the dollar’s strength.  While that will help moderate inflation, it will negatively impact manufacturing competitiveness.  And that is the balance that every government wants to control but is impossible to do.  This is the very essence of Triffin’s dilemma.

(PS: if you want to protect against that hotter inflation, a great tool is USDi, the only fully backed, CPI tracking cryptocurrency available.)

Turning from the political, which keeps interfering in the daily financial commentary, to the financial directly, we have continued to see pressure on the semiconductor sector drive US equity markets a bit lower, notably the NASDAQ, which continues to play out elsewhere around the world.  In Asia, the Nikkei (-0.65%) was emblematic of that with the Hang Seng (-0.25%) slipping as well, but in truth, Asia had an overall better performance as Taiwan (+1.4%), Australia (+1.1%) and Korea (+0.4%) all fared well.  I think some of this was a reversal of the previous day’s sharp declines on the semiconductor concerns although Australia was the beneficiary of some solid Flash PMI data.

In Europe, however, all markets are weaker this morning led by the CAC (-0.6%) and IBEX (-0.6%) with the DAX (-0.3%) and FTSE 100 (-0.3%) not quite as badly off after PMI data there showed things were better than last month, but still not particularly great.  It seems the commentary attached to the numbers indicated serious concerns about future activity.  As to US futures, at this hour (7:15) they are modestly lower across the board, on the order of -0.15%.

In the bond market, zzzzzz’s are the story.  While yields have edged slightly higher this morning (+1bp in Treasuries, +2bps to +3bps in Europe), the trend remains a flat line with none of these markets doing anything other than chopping around.

Source: tradingeconomics.com

The one exception here is Japan, which has seen 10-year yields march consistently higher over the past year with the past 10 sessions showing consistently higher yields.  Perhaps their debt chickens are finally coming home to roost.

Source: tradingeconomics.com

Turning to commodities, oil’s (+0.85%) modest bounce continues but it remains nearer the bottom than the top of its recent trading range.  The EIA data yesterday showed a surprisingly large draw in crude oil as well as gasoline stocks with reduced imports, so this does make sense.  In the metals markets, yesterday’s rally is being reversed this morning with the major markets all lower by about -0.4%.

Finally, the dollar remains quite uninteresting excepting two currencies; NOK (+0.6%) which is clearly benefitting from the recent rebound in oil while JPY (-0.4%) is under further pressure as there appears to be an increase in short JPY carry trades being initiated, especially against the dollar as more traders discount the idea the Fed is even going to cut 25bps next month.  Otherwise, there is nothing noteworthy here this morning.

We finally get data this week as follows: Initial (exp 225K) and Continuing (1960K) Claims, Philly Fed (7.0), Flash PMI (Manufacturing 49.5, Services 54.2) and Existing Home Sales (3.92M).  We also hear from Atlanta Fed president Bostic this morning, but I do believe the market remains almost entirely focused on Powell’s speech tomorrow.  Of course, if the semiconductor space continues to underperform, that would be an entirely different kettle of fish and likely create some serious market adjustments.  

Net, it is difficult for me to remain too bearish the dollar overall, especially if the market starts to price out a rate cut in September.

Good luck

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Seek the Abyss

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As so often has been the case
The market is in Trump’s embrace
Will he make a deal
And sell it with zeal
Or will Putin spit in his face
 
Because of the focus on this
Though PPI data did miss
Most markets held tight
With highs still in sight
As naysayers seek the abyss

 

Based on the fact that equity markets in the US were all essentially unchanged yesterday, I think it is reasonable to assume that investors are waiting to see the outcome of today’s Trump-Putin meeting in Alaska.  I have no opinion on how things will work out, although I am certainly rooting for a result that includes a ceasefire and the next steps toward a lasting peace.  From a direct market perspective, arguably oil (-0.75% this morning) is the one place where the outcome will have an impact.  Any type of deal that results in the promised end to sanctions on Russian oil seem likely to push prices lower.  In this vein, we continue to see the IEA and EIA reduce their demand forecasts (although some of this is because they keep expecting BEVs to replace ICE engines and that is not happening at the pace they would like to see). However, away from oil, I expect that this will be much more important to overall sentiment than anything else.

But sentiment matters a lot.  As does the attention span of traders, which as we already know, approximates the life of a fruit fly.  For instance, yesterday’s PPI data was unambiguously hotter than expected, with both headline and core monthly jumps of 0.9%.  Surprisingly for many economists, it was not goods prices that rose so much, but rather the price of services.  For the narrative, it is much harder to blame service price hikes on tariffs, than goods price hikes, but not to worry, economists are working hard to make that case.  As well, the near universal claim is that CPI is going to rise much more quickly going forward as evidenced by this rise in PPI.  A quick look at the chart below of annualized PPI shows that we are starting to rise above levels last seen in 2018, but if you recall, CPI then was very low, sub 2.0%. The relationship between the two, CPI and PPI, is not as strong as you might expect.

The contra argument here is that corporations, which were able to raise prices rapidly during the pandemic response are finding it more difficult to do so now.  We have discussed several times how corporate profit margins remain extremely high relative to history and what we may be seeing is the beginnings of those margins starting to compress as companies absorb more of the costs, be they tariffs or labor.  I also couldn’t help but notice the article in the WSJ this morning working to explain why tariffs haven’t boosted inflation as much as many economists expected.  Their answer at least according to this research, is that the many exemptions have resulted in tariffs being collected on only about half of imports, which despite all the headlines touting tariffs are now, on average, somewhere near 18%, makes the effective rate below 10%, higher than in the past, but not devastatingly so.  And remember, imports represent about 14% of GDP.  Let’s do that math.  If half of imports are excluded and the average tariff is more like 9%, we’re looking at 60 basis points of price increases, of which corporates are absorbing a great deal.  

One other thing in the article was how it highlighted the exact result that President Trump is seeking when explaining that more companies are searching for alternative sources of goods in the US.

The tariffs, are however, impacting other nations with China last night reporting a much weaker batch of data as per the below:

                                                                                                              Actual          Previous            Forecast

The property market there continues to drag on the economy, but government efforts to prop up consumption seem to be failing and clearly tariffs are impacting IP as less orders from the US result in less production.  Arguably, though, President Xi’s greatest worry is the rise in Unemployment as the one thing he REALLY doesn’t want is a lot of unemployed young males as that is what foments a revolution.  The interesting thing about the market response here is that while the Hang Seng (-1.0%) fell sharply, the CSI 300 (+0.7%) rallied, seemingly on hopes of additional stimulus being necessary and implemented.  One other thing to note about Chinese markets is that yesterday, 40-year Chinese government yields fell below 30-year Japanese yields for the first time ever, a sign that expectations of future Chinese activity are waning.  With this in mind, even though the renminbi has been gradually appreciating this year (even if we ignore the April Liberation Day spike), the Chinese playbook remains mercantilist at its heart.  I would look for a weaker CNY going forward, although the overnight move was just -0.1%.

Source: tradingeconomics.com

Ok, let’s look at the rest of markets ahead of the Alaska summit and today’s data.  Tokyo (+1.7%) had a strong session as GDP data from Japan was stronger than expected allaying worries that the tariffs would crush the economy there and bringing rate hikes back onto the table.  Australia (+0.7%), too, had a good session on solid corporate and bank earnings but the rest of the region was pretty nondescript with marginal moves in both directions.  In Europe, gains are the order of the day on the continent (DAX +0.3%, CAC 0.65%, IBEX +0.35%, FTSE MIB +1.1%) as hopes for a formalized trade deal being finalized grow.  However, UK stocks are unchanged on the session as investors here seem to be biding their time ahead of the Trump-Putin summit.  US futures are higher led by DJIA (+0.7%) although that appears to be on news that Berkshire Hathaway has taken a stake in United Health after the stock’s recent beatdown.

In the bond markets, Treasury yields are unchanged this morning although they reversed course yesterday, closing higher by 5bps rather than the -3bp opening, pre-PPI, levels.  But that rebound in yields has been seen throughout Europe where sovereigns on the continent are higher by between 3bps and 4bps and JGB yields (+2bps) rose overnight after the stronger than expected GDP data.

Away from oil, metals markets are doing very little this morning as it appears much of the activity has to do with option expirations in the ETFs SLV and GLD, so price action is likely to be choppy, but not instructive.

Finally, the dollar is softer this morning despite the higher Treasury yields.  One of the interesting things is that despite the hotter PPI data, the probability for a September cut, while falling from a chance of 50bps, to a 92.6% probability of a 25bp cut, is still pricing in an almost certain cut.  Remember, we are still a month away from that meeting and we have Jackson Hole in between as well as another NFP and CPI report so lots of potential drivers to change views.  And there is still a lot of talk of a 50bp cut, although for the life of me, I don’t understand the economic rationale there.  But softer the dollar is, falling against all its G10 brethren, on the order of 0.25% or so, and most EMG counterparts, with many having gained 0.4% or so.  But this is a dollar story today.

On the data front, ahead of the summit, which I believe starts at 2:30pm Eastern time, we see Retail Sales (exp 0.5%, 0.3% -ex autos, 0.4% Control Group) and Empire State Mfg (0.0) at 8:30, as well as IP (0.0%), Capacity Utilization (77.5%) at 9:15 and then Michigan Sentiment (62.0) at 10:00.  Retail Sales should matter most as a strong number there will encourage the equity bulls while a weak number will surely bring out the naysayers.  I still have a bad feeling about markets here, but that is my gut, not based on the data right now.  As to the dollar, there are still huge short positions out there and if rate cuts become further priced in, it can certainly decline further.

Good luck and good weekend

Adf

Lest ‘Flation Has Spice

Posted on by

The market absorbed CPI
And equities started to fly
Though Core prices rose
T’was Headline, I s’pose
Encouraged investors to buy
 
As well, Fed funds futures now price
The Fed will cut rates this year thrice
The upshot’s the buck
Is down on its luck
Beware though, lest ‘flation has spice

 

Core prices rose a bit more than forecast in yesterday’s CPI report although the headline numbers were a touch softer.  The problem for the Fed, if they are truly concerned about the rate of inflation, is that the strength of the numbers came from core services less shelter, so-called Supercore, a number unimpeded by tariffs, and one that has begun to rise again.  As The Inflation Guy™ makes clear in his analysis yesterday, it is very difficult to look at the data and determine that 2% inflation is coming anytime soon.  I know the market is now virtually certain the Fed is going to cut in September, but despite President Trump’s constant hectoring, I must admit the case for doing so seems unpersuasive to me.

Here are the latest aggregated probabilities from the CME and before you say anything, I recognize the third cut is priced in January, but you need to allow me a little poetic license!

However, since I am just a poet and neither institutions nor algorithms listen to my views, the reality on the ground was that the lower headline CPI number appeared to be the driver yesterday and into today with equities around the world rallying in anticipation of Fed cuts.  As well, the dollar is under more severe pressure this morning on the same basis.  However, it remains difficult for me to look at the situation in nations around the world and conclude that the US economy is going to underperform in any meaningful way over time.  

So, to the extent that a currency’s relative value is based on long-term economic fundamentals, it is difficult to accept that the dollar’s relative fiat value will decline substantially, and permanently, over time.  I use the euro as a proxy for the dollar, which is far better than the DXY in my opinion as the Dollar Index is a geometric average of 6 currencies (EUR, JPY, GBP, CAD, SEK and CHF) with the euro representing 57.6% of the basket.  And I assure you that in the FX markets, nobody pays any attention to the DXY.  Either the euro or the yen is seen as the proxy for the “dollar” and its relative value.  At any rate, if we look at a long-term chart of the euro below, we see that the twenty-year average is above the current value which pundits want to explain as a weak dollar.  Too, understand that back in 1999, when the euro made its debut, it started trading at about 1.17 or so, remarkably right where it is now!

Source: finance.yahoo.com

My point is that the dollar remains the anchor of the global financial system, and given the current trends regarding both economic activity and the likely ensuing central bank policies, as well as the ongoing performance of US assets on a financial basis, while short-term negativity on the dollar can be fine, I would be wary of expecting it to lose its overall place in the world.

Speaking of short-term views, especially regarding central bank activities, it appears clear that the market is adjusting the dollar’s value on this new idea of the Fed cutting more aggressively.  If that is, in fact, what occurs, I accept the dollar can decline relative to other currencies, but I really would be concerned about its value relative to things like commodities.  And that has been my view all along, if the Fed does cut rates, gold is going to be the big beneficiary.

Ok, let’s review how markets have absorbed the US data, as well as other data, overnight.  Yesterday’s record high closings on US exchanges were followed by strength in Tokyo (+1.3%), Hong Kong (+2.6%), China (+0.8%) despite the weakest domestic lending numbers in the history of the series back to 2005.  In fact, other than Australia (-0.6%) every market in Asia rallied.  The Australian story was driven by bank valuations which some feel are getting extreme despite the RBA promising further rate cuts, or perhaps because of that and the pressure it will put on their margins.  Europe, too, is rocking this morning with gains across the board led by Spain (+1.1%) although both Germany (+0.9%) and France (+0.6%) are doing fine.  And yes, US futures are still rising from their highs with gains on the order of 0.3% at this hour (7:45).

In the bond market, Treasury yields have slipped -3bps this morning, with investors and traders fully buying into the lower rate idea.  European sovereigns are also rallying with yields declining between -4bps and -5bps at this hour.  JGBs are the exception with yields there edging higher by 2bps, though sitting right at their recent “home” of 1.50%.  as you can see from the chart below, 1.50% appears to be the market’s true comfort level.

Source: tradingeconomics.com

In the commodity space, oil (-0.6%) continues to slide as hopes for an end to the Russia-Ukraine war rise ahead of the big Trump-Putin meeting on Friday in Alaska.  Nothing has changed my view that the trend here remains lower for the time being as there is plenty of supply to support any increased demand.

Source: tradingeconomics.com

Metals, meanwhile, are all firmer this morning with copper (+2.6%) leading the way although both gold (+0.4%) and silver (+1.7%) are responding to the dollar’s decline on the day.

Speaking of the dollar more broadly, its decline is pretty consistent today, sliding between -0.2% and -0.4% vs. almost all its counterparts, both G10 and EMG.  This is clearly a session where the dollar is the driver, not any particular story elsewhere.

On the data front, there is no primary data coming out although we will see the weekly EIA oil inventory numbers later this morning with analysts looking for a modest drawdown.  We hear from three Fed speakers, Bostic, Goolsbee and Barkin, with the latter explaining yesterday that basically, he has no idea what is going on and no strong views about cutting or leaving rates on hold.  If you ever wanted to read some weasel words from someone who has an important role and doesn’t know what to do, the following quote is perfect: “We may well see pressure on inflation, and we may also see pressure on unemployment, but the balance between the two is still unclear.  As the visibility continues to improve, we are well positioned to adjust our policy stance as needed.”  

And that’s all there is today.  The dollar has few friends this morning and I see no reason for any to materialize today.  But longer term, I do not believe a dollar weakening trend can last.

Good luck

Adf

Misguided

Posted on by

On Friday, the news was a sign
Of imminent US decline
The Fed was a hawk
And all of the talk
Was Trump’s actions wiped off the shine
 
But yesterday, markets decided
That Friday’s response was misguided
They’ve come to believe
A Fed funds reprieve
By Powell will soon be provided

 

As I have frequently written in the past, markets are perverse.  The narrative Friday was about the dire straits in which the US found itself with the employment situation collapsing and the recession that has been forecast for the past three years finally upon us.  Part of this story was because of the Fed’s seeming intransigence regarding interest rates as made clear by Chairman Powell’s relatively hawkish comments at the FOMC press conference last week.

But that story is sooo twenty-four hours ago. In the new world, the huge bond market rally that was seen on Friday, and equally importantly, the changing pricing of Fed funds rate cuts has the new narrative as, the Fed is going to cut so buy stonks!  Confirmation of this new narrative was provided by SF Fed President Mary Daly who remarked yesterday evening, “time is nearing for rate cuts, may need more than two.”  All I can say is wow!  

The below chart shows the daily moves, in basis points, of the 2-year Treasury note which is seen as the market’s best indicator or predictor of future Fed funds rates.  On Friday, the yield fell nearly 25bps, essentially pricing in one additional rate cut coming, and as we saw with the Fed funds futures market, that pricing is now anticipating three cuts this year.  Ms Daly merely reconfirmed that news.

Source: https://x.com/_investinq/status/1951356470877925408?s=46

Perhaps it is fair to ask why Daly has taken so long to come around to this view.  After all, she is a known dove and has been for her entire time at the Fed.  As I have asked before, why haven’t the other known doves, like Governors Cook and Jefferson, been out there talking about rate cuts?  For anyone who wants to continue to believe that the Fed is apolitical, nonpartisan or above politics, this is exhibit A as to why it is not.  In fact, if you look, only one Board member was considered a hawk in this analysis by In Touch Markets, and she just resigned.  The other hawks are all regional Fed presidents.  Perhaps this is why they were so slow to raise rates when inflation was roaring in 2022 and why they were so anxious to cut rates in 2024 on virtually no news other than the upcoming election. 

To be clear, until Friday’s NFP data, it was difficult to make the case, in my mind, for a cut because I continue to see inflationary pressures beyond any tariff impacts.  But if the labor market is weaker than had been assumed, that will certainly open the door to more cuts.  Of course, the conundrum is, if the economy is so weak that the Fed needs to cut, why are stocks rallying?  Arguably, a weak economy would foretell weaker earnings growth, a direct negative to equity valuations.  But that appears to be old-fashioned thinking.  I guess I am just an old-fashioned guy.

Ok, let’s turn to the overnight activity.  Starting with bonds, since the big move Friday, Treasury yields have been little changed, climbing 2bps overnight to 4.21%, but still hovering near the bottom of their recent trading range with only the Liberation Day announcement panic showing yields below the current level.  This is a great boon for the Treasury as auctions of 3-, 10-, and 30-year Treasuries are due this week starting with the 3-year today.

Source: tradingeconomics.com

European sovereign yields have also edged higher by 1bp across the board after PMI data was released this morning, pretty much exactly at expected levels.  The outlier last night was JGB yields which slipped -4bps and continue to slide away from designs of a BOJ rate hike.

In the equity markets, yesterday’s US rally was followed almost universally in Asia (Japan +0.65%, China +0.8%, Hong Kong +0.7%, Australia +1.2%) with only India (-0.3%) lagging there.  As to Europe, it too is having a good day with the DAX (+0.8%) leading the way although strength almost everywhere as the PMI data was good enough to keep spirits higher.

In the commodity markets, oil (-1.1%) is slipping for a fourth consecutive day, but is still right in the middle of its $60 – $70 trading range.  There remain so many potential geopolitical issues with saber rattling between the US and Russia and President Trump’s threatened excess tariffs on nations who buy Russian oil that it remains difficult to discern supply/demand characteristics.  Certainly, if the US is heading into a recession, that is likely to dampen demand for a while, but that remains unclear at this time.  As to the metals, gold (-0.65%) is giving back some of its post NFP gains but if I look at the chart below, all it shows is a relatively narrow trading range with no impetus in either direction.  

Source: tradingeconomics.com

The rest of the metals complex is being dragged lower by gold this morning, but not excessively so.

Finally, the dollar is a touch stronger today, despite the rate cut talk, as the euro (-0.4%) and yen (-0.55%) lead the G10 currencies down.  While I understand the rationale for the dollar to soften in the short- and medium-term vs its counterparts, it is very difficult for me to look at the political and economic situations elsewhere in the world and think I’d rather be investing there.  Europe is a mess as is Japan.  And don’t get me started on the emerging market bloc.  So, remember, while day-to-day movements can be all over the map and are impacted by things like data releases or announcements, structural strength or weakness remains largely in place, and the US situation appears stronger than most others for now.   Touching briefly on EMG currencies, the dollar is firmer vs. virtually all of them, mostly on the order of 0.4% or so.

On the data front, today brings the Trade Balance (exp -$61.4B) and then ISM Services (51.5) at 10:00.  We don’t get the first post-FOMC speech until tomorrow by Governor Cook, so it will be interesting to see if there are more doves who are willing to show their colors.  But in the end, as demonstrated by the quick reversal of the narrative from Friday to Monday, there remains an underlying bid to risk assets and we will need to see substantial economic weakness to remove that bid, even temporarily.

Good luck

Adf

Qualm(s)

Posted on by

As all of us wait for the Fed
And try to absorb what’s been said
Investors are calm
Though pundits have qualm(s)
Their warnings of problems are dead
 
While no move is likely today
So many continue to pray say
A rate cut is coming
To keep markets humming
So, shorts best get out of the way

 

Markets have been in wait and see mode, at least equity markets have, for the past week as investors, traders and algorithms seek something new to discuss.  In fact, a look at the chart below shows that the S&P 500 has moved the grand total of 9 points over the past week!

Source: finance.yahoo.com

Yes, there have been some earnings announcements, with a couple of key ones this afternoon (MSFT and META), but there continues to be an increasing focus on the FOMC which will announce their policy decision (no change) this afternoon.  The focus is really on what Chair Powell will hint at in the ensuing press conference.  At this point, I would say it is baked in the cake that two governors, Waller and Bowman, are going to dissent seeking a 25bp rate cut.

Ironically, if markets are looking for a catalyst from this FOMC meeting, I believe they are looking in the wrong place.  Chairman Powell will do everything he can to not answer any question about anything whatsoever, whether on the likely trajectory of future policy decisions or whether he will resign or be fired.  And so, we will need to look elsewhere for market moving catalysts.

Of course, there is always the White House, which has proven to be a rich source of uncertainty, and then there is the data onslaught starting today through Friday, which if it comes in differently than forecast, will have the opportunity to move markets.  Regarding the former, I will not even attempt to guess what the next story will be.  However, the latter is a potentially rich vein to be mined for insight.

To set the table, a look at yesterday’s outcomes is worthwhile.  The Goods Trade Balance fell to -$86B, substantially less than forecast, on the back of a significant decline in consumer goods imports.  While the data still shows a deficit, I imagine Mr Trump is pleased with the direction.  Certainly, compared to the trend prior to his election (as well as the front-running of tariffs early this year) it seems a modest improvement, or at least a reduction. (see chart below)

Source: tradingeconomics.com

Otherwise, Home Prices rose less than forecast and continue to slow their pace of increase and job openings were withing spitting distance of forecast at 7.44M, although somewhat lower than last month.  Finally, Consumer Confidence continues to rebound.  While equity markets were nonplussed, with US markets slipping a bit on the day, Treasury bonds rallied nicely with 10-year yields sliding -8bps on the day.  The bulk of that rally was based on a very positive 7-year auction, with the bid-to-cover ratio rising to 2.79, and dealers only getting 4% of the issue, the lowest level recorded since 2004.  In other words, investors took in virtually the entire $44 billion.  This morning, we will also learn about Treasury’s planned quarterly issuance, although estimates are there will be no increase in long-term bonds, with T-bills continuing to be the main financing vehicle for now.

Too, this morning we will get the ADP Employment report (exp 75K) and the first look at Q2 GDP (2.4% after -0.5% in Q1).  While all of that could have an impact, my sense is that tomorrow’s PCE data and Friday’s NFP will be of much more import.  A final though this morning is that the BOC is going to complete their policy meeting, but no change is expected there.

If we consider this information, absent a new surprise from the White House on your bingo card, it seems to me Friday is the most likely timing for any substantive movement in equities or bonds.  And with that in mind, let’s look at how other markets have been responding to things.

Yesterday’s modest declines in the US were followed by a mixed picture in Asia with both Japan and China little changed on the day although Hong Kong (-1.4%) was under pressure as the US-China trade talks stumbled for now.  But much of the rest of the region had a solid session with Australia (+0.6%) rallying after better-than-expected inflation data encouraged traders to price in a rate cut by the RBA at their next meeting.  But there were gains in Korea, India and Taiwan as well with only Indonesia really lagging.  In Europe, it is a mixed session with the CAC (+0.45%) leading the way higher while both the IBEX (-0.2%) and FTSE 100 (-0.3%) are lagging as Eurozone data was mixed with inflation edging higher in Spain although Eurozone GDP came in a tick better than forecast.  However, the big discussion there continues to revolve around the details of the trade deal.  As to US futures, they are a touch higher at this hour (7:40), about 0.25%.

In the bond market, after yesterday’s rally, US yields are unchanged on the day, trading at the low end of their recent range, while European sovereign yields are all lower by -2bps (Gilts are -5bps) as the US move came later in the day and Europe didn’t really participate yesterday.  Overnight, JGB yields slipped -1bp, but Australian govies fell -7bs as thoughts of rate cuts danced in traders’ heads.

In the commodity markets, oil (-0.65%) is giving back some of its gains that were catalyzed by President Trump’s threats to Russia if they don’t sit down in the next 10 days, rather than the original 50-day window.  As to metals markets, gold is unchanged this morning, still trading in the middle of its range, although we have seen some weakness in both silver (-0.9%) and copper (-0.8%) but it seems more in line with ordinary trading than with any new news.

Finally, the dollar is continuing its rebound as the euro (-0.2%) retreats further from its recent highs and is now lower by more than -2% in the past week.  In fact, the DXY has traded back above 99.0 for the first time since early June as the bottoming formation that I have highlighted over the past several days continues to prove prescient.  In fact, some might say the dollar is starting to accelerate higher!  Once again, I would highlight that the descriptions of the dollar’s demise were greatly exaggerated.

Source: tradingeconomics.com

And that’s pretty much all there is to discuss.  We are firmly in the middle of the summer doldrums where market activity remains subdued at best.  Given the prominence of algorithms in trading most markets, it will require something new and unexpected to get things going.  Of course, perhaps this evening’s earnings data will start some movement, but I’m still focused on Friday.

Good luck

Adf

All Its Sophists

Posted on by

The art of the deal
Tokyo and Washington
Birds of a feather

 

Seemingly, the biggest news story of the evening was the trade agreement between the US and Japan, where reciprocal tariffs have been set at 15%, including on Japanese autos, and Japan has pledged to invest $550 billion in the US, which I assume is from private corporations although that was not specified.  However, they did explain that one of the investments would be Alaskan North Slope natural gas liquification, a project that has been on the boards for more than 20 years.  Thus far, this seems like a big win and major milestone in President Trump’s trade strategy as it also opened Japanese markets to American products, including rice which had been a key sticking point.

The market response was as might be expected with the Nikkei (+3.5%) rallying sharply and taking virtually every regional Asian market higher for the ride as the conclusion of a deal in the preferred timeline was seen as a precursor to others falling in line.  It is quite interesting that this happened so shortly after PM Ishiba’s election disaster on Sunday, but perhaps that was his motivation.  He needed a big win and conceding on some points to get a deal was much preferred to holding out and getting nothing.  However, JGB markets saw things differently as a very weak 40-year JGB auction (lowest bid-to-cover ratio of 2.127 since 2011) led to long-dated yields rising between 8bps and 10bps last night, with the 10-year yield trading back to the highs seen in late March.

Source: tradingeconomics.com

While the stock market was giddy, apparently the only discussion in the bond market was whether Ishiba-san would be forced to resign, leaving Japan with a leadership vacuum.  Meanwhile, the yen (+0.3%) did very little overnight although it has been creeping higher since the election results.  My sense is Japanese investors are cautiously heading home, but I would not look for a major move lower in USDJPY, rather the current gradual pace makes sense.

A juxtaposition exists
Twixt Europe with all its sophists
And stolid Japan
Who finished their plan
On trade despite recent vote twists

As trade continues to be the topic du jour, it is no surprise that the chatter out of European capitals is that they will fight to get the best trade deal possible.  (I cannot help but laugh at Friedrich Merz saying, if they [the US] want war, we will give them a war).  However, it is also no surprise that markets have looked at the Japanese deal and increased the pressure on EU negotiators to achieve a solution by the end of the month.  First off, every European official wants to go on holiday in August, so they will want to have completed things.  But secondly, equity investors have taken the fact that deals with major counterparties can be accomplished as a sign that the EU is next.  And if they do not agree terms, it will be a double whammy of political and financial problems as you can be certain that the equity gains we are seeing today and have been steady so far this year (see below), will likely reverse on a failure to agree.

                                                                                     Today        1 Week        1 Month          YTD

Source: tradingeconomics.com

But, away from the trade story, and various political stories in the US that are unlikely to have any immediate impact on markets, that’s kind of all there is to discuss.  The Fed meets next week and there is no expectation of a rate move.  The ECB meets tomorrow and there is no expectation of a rate move.  Important data is scarce on the ground and the focus on crypto and meme stocks continues.  In fact, this is likely the best descriptor of a market that has abundant liquidity and shoots down the case for cutting rates at all.  In the meantime, let’s look at how other markets behaved overnight.

You will not be surprised that US equity futures are all pointing higher this morning, and we have already discussed the rest of the equity markets around the globe.  In the bond markets, after declining yesterday, yields have stabilized this morning (Treasuries +1bp, Bunds +1bp, OATs +1bp) although UK Gilt yields (+5bps) have underperformed as there continue to be concerns over the fiscal picture in the UK as well as questions about PM Starmer’s ability to stay in his seat.  In fact, UK 10-year yields are the highest in the developed world right now, and while they have been knocking back and forth for a few months, show no sign of falling regardless of the BOE’s future actions.

In the commodity space, oil (-0.7%) has been slipping back to the bottom of its post 12-day war range amid lackluster overall activity.  Just as there didn’t seem to be an obvious driver when oil rallied to $68/bbl, too there is no clear driver of the recent decline.  I continue to believe this is market internals rather than macro fundamentals.  In the metals markets, after a major rally yesterday across the board, gold (-0.25%) is consolidating but silver (+0.1%) is pushing within spitting distance of a major milestone, $40/oz, while copper (+1.2%) sees the benefits of the trade deal and is rallying nicely.

Finally, the dollar is mixed this morning.  While the yen is firming and the effects of the trade deal seem to be helping Aussie (+0.6) and Kiwi (+0.75%), the euro and pound are both little changed.  in fact, the rest of the G10 is +/- 0.1% on the day, so nothing at all happening.  In the EMG bloc, KRW (+0.3%) is the biggest mover with every other currency across regions +/- 0.15% or less and showing no signs of a trend right now.  Broadly, the dollar appears to be in a downtrend, but short dollars is one of the most crowded trades in the hedge fund and CTA communities, and that gets expensive given US funding costs are higher than pretty much everybody else’s right now.  Depending on how you draw your trend line (and I am no market technician), it appears that the dollar broke above that line and is now getting set to retest it.  I would not be surprised to see a more substantial bounce on the next move.

Source: tradingeconomics.com

And that is really all there is today.  This morning’s data consists of Existing Home Sales (exp 4.01M) and EIA oil inventories with a small draw expected.  The Fed is in their quiet period so no speakers which means that all eyes will, once again, turn toward the White House to see who has the right squares on their bingo card.

Good luck

Adf

Not Crashing

Posted on by

The data was pretty darn good
And so, it must be understood
The world is not crashing
Though some things are flashing
Red signs, where recession’s a ‘could’

 

A review of yesterday’s economic data shows that Retail Sales were stronger than expected on every metric and subcomponent, Import Prices rose a scant 0.1%, the Philly Fed Index was much stronger than expected and Jobless Claims fell on both an Initial and Continuing basis.  In truth, it was a sweep of positive economic news.  As such, we cannot be surprised that equity markets responded positively, as did the dollar, while bonds held their ground, given the lack of inflationary signals.  But if we look at the movements in markets, they remain very modest overall.  Sure, the S&P 500 made a new high, by 2 points, but if you look at the chart below, since July 3rd, the rally has been 26 points, or 0.4%.  This is hardly the stuff of excitement.

Source: tradingecononmics.com

Of course, this did not stop the pundits who are calling for recession to highlight any negative subtext, nor did it prevent Fed Governor Waller from claiming that a rate cut in July was appropriate because the labor market is on the edge.  But the naysayers find themselves with diminishing attention these days as market price action has been quite positive.  In fact, most markets have shown similar behavior.  Whether gold or oil or other equity indices or bonds, we have been in a narrow range for a while now and it is not clear what it will take to break us out.  But here’s one thought…

On Sunday, Japan
Will vote for their Upper House
Is there change afoot?

While market insiders will discuss today’s options’ expirations as the key driver of things in the short-term, I think we need turn our eyes Eastward to Japan’s Upper House elections this Sunday.  PM Ishiba’s LDP-Komeito coalition is already in a minority status in the more powerful Lower House, a key reason why so little has been accomplished there.  But at least he had a majority in the Upper House to rubber stamp anything that was enacted.  However, signs are pointing to the LDP losing their majority in the Upper House which could well lead to Ishiba getting forced out.

Now, why does this matter to the rest of us?  There is a case to be made that flows in the JGB market are an important driver of global bond flows, including Treasuries.  For instance, Japan is the second largest net creditor nation with about $3.73 trillion invested abroad (according to Grok), much of which is Japanese insurance companies searching for higher yields than have been available there for the past decades. You may remember back in May, when there was a spike in long-dated JGB yields as all maturities from 20 years on out reached new historic highs (see below chart), well above 3.0%. 

Source: tradingeconomics.com’

Now, consider if you were a Japanese life insurer looking to match your assets to your liabilities.  Historically, buying Treasury bonds, with their much higher yield, was the place to be, especially over the past several years when the yen weakened, adding to your JPY gains.  However, that is still a risky trade, and hedging the FX risk is expensive given the yield differential between the US and Japan.  (Hedgers need to sell USD forward and the FX points reduce the effective exchange rate and by extension the benefits of the higher bond yields.)

But now, for the first time ever, JGB yields are above 3.0%, and that can be earned by a Japanese life insurer with zero FX risk, a very attractive proposition.  In fact, Bloomberg has an article this morning discussing just such a situation with one of the larger insurers, Fukoku Life.

Circling back to the election, it appears that the key issues are the rising cost of living and what the government is going to do about it.  Apparently, there are two approaches; the LDP is talking about giving out cash bribes grants of ¥20,000 to individuals while the opposition is talking about reducing consumption taxes on necessities like food.  However, in either case, the reality is that fiscal policy would loosen further with the MOF needing to issue yet more JGBs to make up for either the increased outlays or reduced income.  Add to that the uncertainty over future Japanese policy if the LDP loses its majority, and the pressure from the US regarding tariff negotiations and suddenly, it makes a lot more sense that the knock-on effects of this election can be substantial, at least with respect to the global bond markets and the USDJPY exchange rate.  (It must be said that Japanese inflation data last night actually fell to 3.3%, but that was due entirely to declining oil prices as fresh food prices, the big issue there, continue to rise.)

An election outcome that weakens PM Ishiba, potentially leading to a fall of his government and new elections in the Lower House, would be a distinct negative for the yen, and likely for the JGB market.  The impact would be felt in global bond markets as yields in the back end would almost certainly rise everywhere around the world.  This is not to imply that yields would rise by 100bps or more, but rather that the current trend of rising long-dated yields would continue for the foreseeable future.  And that will make things tough on every government.

Ok, sorry, I went on a bit long there.  A quick turn through markets shows that other than Japan (-0.2%) Asian equity indices were mostly nicely in the green following the US lead with the biggest winners Australia (+1.4%), Hong Kong (+1.3%) and Taiwan (+1.2%).  Meanwhile, in Europe this morning, while green is the color, the movement has been miniscule, averaging about 0.1% gains.  And US futures are also modestly higher at this hour (7:00) about 0.15% across the board.

In the bond market, Treasury yields have edged lower by -2bps but European sovereign yields are all higher by 2bps across the board.  The talk in Europe is over concerns regarding the conclusion of a trade deal with the US, where concerns are growing nothing will be achieved by the end of the month.

In the commodity markets, oil (+1.3%) is continuing its rebound, perhaps on the beginnings of a belief that the economy is not going to crater in the US.  Certainly, yesterday’s data was positive.  As to the metals markets, they are in fine fettle this morning with both gold (+0.4%) and silver (+0.4%) trading back to the middle of their trading ranges and copper (+1.3%) pushing back toward its recent all-time highs.

Finally, the dollar is under pressure this morning, sliding against the euro (+0.25%), pound (+0.2%) and AUD (+0.4%).  But the real movement has been in the commodity space where NOK (+0.8%) and ZAR (+0.7%) are both having solid days.  There continues to be a great deal of discussion regarding President Trump’s desire to fire Chairman Powell with a multitude of articles describing how that would be the end of the world as we know it because the Fed cherishes their “independence”.  Let’s not have that discussion.

On the data front, this morning brings Housing Starts (exp 1.3M) and Building Permits (1.39M) and then Michigan Sentiment (61.5) at 10:00.  There are no Fed speakers on the slate for today although Governor Kugler, not surprisingly, explained that waiting was the right call for the Fed when she spoke yesterday.  

It is a Friday in the summer with relatively unimportant data.  Absent another surprise from the White House Bingo card, I expect a quiet session overall as most traders and investors leave the office early for the weekend.  The dollar’s biggest risk is the Fed does cut early, but if the data keeps cooperating, it will be much harder for dollar bears, especially since so many are already short, to sell it aggressively from here.

Good luck and good weekend

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