Tag Archives: #tariffs

Tripping Off Tongues

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Recession is tripping off tongues
And pundits ain’t twiddling their thumbs
Political shades
Are driving tirades
And screams at the top of their lungs
 
But are we that likely to see
A minus in our ‘conomy?
We certainly could
And probably should
But life doesn’t always agree

 

The major discussion point over the weekend has been recession, and how likely we are to see one in the US in the coming months.  Of course, this matters to the punditry not because of any concern over the negative impacts a recession has on the population, but ‘more importantly’ because recessions tend to result in sharp declines in equity values.  And let’s face it, do you honestly believe that the editors of the New York Times or the Wall Street Journal are remotely interested in the condition of the majority of the population?  Me neither. 

However, if they can call out something that they believe can impede President Trump, or detract from his current high ratings, they will play that over and over and over.  Funnily enough, when I went to Google Trends, I looked up “recession” over the past 90 days with the result below:

That peak was on March 11 although there was no data of note that day compared to a reading of 9 today. Looking at the news of that day, even CNN had a hard time finding bad news with the four top stories being 1) the Continuing Resolution vote in the House being passed, 2) the Department of Education announcing a 50% RIF, 3) 25% tariffs on steel and aluminum being imposed and 4) Ukraine accepting terms for a 30-day ceasefire.  From an economic perspective, the tariffs clearly will have an impact, but it seems a leap that the average American can go from 25% tariffs on imported steel and aluminum to recession in one step.  And based on the positive responses that continue to be seen regarding President Trump’s efforts to reduce the size of government, I doubt the DOE cuts were seen as the beginning of the end of the economy.  

And yet, recession was the talk of the punditry this weekend.  To try to better understand why this is the case, I created the following table of several major economic indicators and their evolution since December, prior to President Trump’s inauguration.

Key indicatorsDecJanFeb
NFP323125151
Unemployment Rate4.10%4.00%4.10%
CPI2.90%3.00%2.80%
Core CPI3.20%3.30%3.10%
PCE2.60%2.50% 
Core PCE2.90%2.60% 
IP1.10%0.30%0.70%
Capacity Utilization77.60%77.70%78.10%
ISM Mfg49.250.950.3
ISM Services5452.853.5
Retail Sales0.70%-1.20%0.20%

Source: tradingeconomics.com

Once again, while I am certainly no PhD economist, this table doesn’t strike me as one demonstrating a clear trend in worsening data, certainly not on an across-the-board basis.  Rather, while you might say January was soft, the February data has largely rebounded.  My point is that despite ABC, NBC, Bloomberg, the BBC and CNN all publishing articles or interviews on the topic this weekend, I’m not yet convinced that is the obvious outcome.

My good friend the Inflation Guy™, Mike Ashton, made an excellent point in a recent podcast of his that is very well worth remembering.   The breadth of the US economy is extraordinarily wide and covers areas from manufacturing to agriculture to finance to energy and technology along with the necessary housing markets as well as the entire population consuming both goods and services.  Added to the private sector, the government sector is also huge, although President Trump and Elon Musk are trying hard to shrink it.  But the point is that it is not merely possible, but likely, that while some areas of the economy may go through weak patches, that doesn’t mean the entire economy is going to sink into the abyss.

If we think back to the last two recessions, the most recent was Covid inspired, which resulted from the government literally shutting down the economy for a period of several months, while giving out money.  Net, things weakened, but even then, there were stronger parts and weaker parts.  Go back to the GFC and the housing bubble popped and dragged banks along with it.  That was the problem because banking weakness inhibits the free flow of money and that will impact everyone.

The question to be asked now, I would suggest is, are we likely to see another catalyst that will have such widespread impacts?  Higher tariffs are not going to do the trick.  Shrinking government, although I believe it is critical for a better long-term trajectory for the economy, will have a short-term impact, but it is not clear to me that it will negatively impact the economy writ large.  Certainly, the Washington DC area, but will it impact the Rocky Mountain area?  Or Texas and Florida?  

Now, a recession could well be on the way.  Running 7% budget deficits was capable of papering over many holes in the economy and pumping lots of liquidity into it as well.  If those deficits shrink, meaning spending shrinks, the pace of activity will slow.  But negative?  It seems a stretch to me, at least based on what we have seen so far.  One last thing here, is how might this potential weakening economic growth impact inflation? Now, we all ‘know’ that a recession causes inflation to decline, don’t we?  Hmmm. While that makes intuitive sense, and we hear it a lot, perhaps the Inflation Guy™ can help here as well.  Back in February he wrote a very good explanation about how that is not really the case at all, at least based on the macroeconomic data.  The truth is economic growth and inflation have very little correlation at all.

Of course, perhaps the most critical issue for the punditry is, will a recession drive stock prices lower?  Here the news is far less sanguine if you are a shareholder and believe there is going to be a recession.  As you can see from the below chart of the S&P 500, pretty much every recession for the last 100 years has resulted in a decline in stock market indices.

Source: macrotrends.net

This is a log chart so some of those dips don’t seem that large, but the average downturn during a recession is about 30%, although that number can vary widely.  To sum it up, while the data doesn’t scream recession to me, it cannot be ruled out.  As well, both President Trump and Secretary Bessent have indicated that weakness is likely going to be a result of their early actions, although the idea is to pave the way for a more stable economic performance ahead.  As I have written repeatedly, volatility is likely the only thing of which we can be certain as all these changes occur.  Hedge your exposures!

Ok, let’s look at the overnight activity.

The rumor is Trump may delay
His tariffs as he tries to weigh
How much he should charge
And how much, writ large,
These nations are going to pay

Equity futures in the US are higher this morning as the big story is that President Trump is considering narrowing the scope of nations who will have tariffs imposed on April 2nd.  Apparently, his administration has identified the “dirty fifteen” nations with the largest bilateral imbalances and they will be first addressed.  The telling comment in the WSJ article I read was when Trump said, “Once you give exemptions for one company, you have to do that for all. The word flexibility is an important word. Sometimes there’s flexibility, there’ll be flexibility.”  To my ear, the final plans are not in place, but my sense is he will impose then remove tariffs, rather than avoid them initially.  Interestingly, that story was written last night, yet Asian equity markets were not that ebullient.  Japan (-0.2%) saw no benefit although Chinese shares (HK +0.9%, CSI 300 +0.5%) fared better. Things elsewhere in the region were mixed with both gainers (India, Thailand) and laggards (Korea, Taiwan, Indonesia) with many bourses little changed overall.

In Europe, green is the predominant color this morning but movement is modest with Spain’s IBEX (+0.4%) the leader and lesser gains elsewhere.  While US futures are all higher by about 1% or more at this hour (6:45) apparently the Europeans aren’t as excited at the tariff delay process.

In the bond market, yields have backed up virtually across the board with Treasuries (+4bps) leading the way higher and most European sovereigns showing yields rising by 1bp or 2bps.  It’s interesting, while there has been much discussion regarding German yields having traded substantially higher in the wake of the effective end of the debt brake and anticipation of much further issuance, a look at the chart below tells me that after that gap higher on the news, concerns over German finances have not deteriorated at all.  And after all, the difference is about 25bps higher, hardly the end of the world.

Source: tradingeconomics.com

In the commodity markets, oil (+0.7%) is continuing its gradual rebound from the lows seen on, ironically, March 11th.  Arguably, what this tells us is that despite the weekend barrage of recession focused articles, the market doesn’t really see that outcome.  In the metals, strength is the word, again, with copper (+1.25%) making new all-time highs on the back of China’s stated goals of growing its strategic stockpile.  Not surprisingly, both gold (+0.2%) and silver (+0.6%) are also climbing this morning alongside copper as commodities remain in greater demand than a recession would indicate.

Finally, the dollar is a bit softer despite rising Treasury yields with both the euro (+0.3%) and pound (+0.4%) bouncing after last week’s modest declines.  And this is despite lackluster Flash PMI readings this morning out of Europe.  The biggest winner is NOK (+0.6%) which given the dollar’s broad weakness and oil’s rebound makes perfect sense.  Otherwise, while the dollar’s weakness is broad, it is no deeper than the aforementioned currencies.

Given the length of this note already (my apologies) and the dearth of data to be released, with only the Chicago Fed National Activity Index (exp +0.08), I will cover data tomorrow as we do end the week with GDP and PCE data.

Headline bingo remains the key concern for all market participants, but ultimately, my altered view of a softer dollar and higher commodities remains intact.

Good luck

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Just a Mistake

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It wasn’t all that long ago
That folks really wanted to know
What Jay and the Fed
Implied was ahead
And if more cuts were apropos
 
But later today when they break
Their words are unlikely to shake
The narrative theme
That whate’er they deem
Important, is just a mistake

 

Presidents Trump and Putin spoke at length yesterday, but no solution was achieved so the Ukraine War will continue unabated for now. While talks are better than not, certainly this is a disappointment to some.  As well, the astronauts who have been stranded in space for the past 8 months are safely back on earth.  I mention these things because they are seemingly far more important than central banks these days, and today, that is all we have to discuss regarding financial markets.

To begin, last night the BOJ left rates on hold as universally anticipated.  The initial market response was for the yen to weaken through 150 briefly, but then Ueda-san spoke and discussed the expected wage increases and how the economy was doing fine, and the new market assessment is that the BOJ will hike rates by 25bps in May at their next meeting.  The market response was to buy back the yen, at least for a little while, although right now, USDJPY seems to be attracted to the 150 level overall.  

Source: tradingeconomics.com

It is worth understanding, though, that the last time short-term interest rates were that high in Japan was back in July 2008.  And they have not been above that level since August 1995.  The below chart from FRED database speaks volumes about just how low interest rates have been in Japan over time, and as an adjunct, just how long the opportunity for shorting JPY on the carry trade has been around.  That dotted line is the Fed funds rate compared to the Japanese overnight rate.  

Along the central bank thesis, Bank Indonesia, too, met last night and left policy on hold with their policy rate at 5.75%.  Governor Warjiyo explained that he felt falling inflation and improving growth would help prevent rupiah weakness despite the fact that the currency has been the worst performing Asian currency this year and is trading at historic lows.

But on to the FOMC meeting which will conclude at 2:00 this afternoon with the policy statement (no change expected although some tweaking of the verbiage is likely) and the release of the latest dot plot.  You have probably forgotten that at the December meeting, the FOMC reduced the median expectation of rate cuts for 2025 from 4 prior to the election to just 2.  In the interim we have seen Fed funds futures trade to where barely one rate cut was priced in, although we are now back to three cuts, seemingly on the idea that tariffs will cause significant economic weakness, and the Fed will need to respond.  At least that’s what the punditry maintains.

Here is the last dot plot for information purposes and it will be interesting to see just how much things have changed.  will longer run rates continue to move higher?  Will 2 rate cuts still be the median outcome for 2025?  All this we get to learn at 2:00.

Source: federalreserve.gov

But arguably, of far more import will be Chairman Powell’s press conference beginning at 2:30.  Prior to the Fed’s quiet period, the broad assessment was that patience in future rate moves was appropriate and they were happy with the current situation.  However, I am confident there will be numerous questions regarding the potential impact of tariffs on monetary policy responses, as well as other things like DOGE and an audit of the Fed.  Will any of it matter?  Maybe at the margin, but for most markets, I suspect that fiscal issues will remain dominant.  The one exception is the FX market, where unalloyed hawkishness could change views on the dollar’s recent weakness (although it is firmer this morning) while a dovish tone will almost certainly undermine the greenback.  So, with no other data of note to be released beforehand, it is clearly the day’s major event.

Ahead of that event, let’s see how markets have behaved overnight.  Following a weak session in the US, where all three major indices were lower by about -1.0% on average, Asia had a mixed picture.  The Nikkei (-0.25%) found no love from Ueda-san and drifted lower.  Both Hong Kong (+0.1%) and China (+0.1%) edged higher but continue to doubt the benefits of the mooted Chinese stimulus program while the rest of the region was mixed with some gainers (Indonesia, Korea, India) and some laggards (Taiwan, Australia, Malaysia).  In Europe, too, the picture is mixed with the DAX (-0.4%) lagging while the CAC (+0.5%) is gaining.  In Germany, the historic breech of the debt brake is not having the positive impact anticipated, or perhaps this is just selling the news.  Overall, though, shares in Europe seem to be awaiting the Fed’s actions, or comments, rather than focusing on anything else.  As to US futures, at this hour (7:30), they are pointing slightly higher, about 0.25% across the board.

In the bond market, Treasury yields have edged up 1bp this morning but continue to hang around 4.30%.  European sovereign debt has seen yields slip -1bp to -2bps, arguably on the Eurozone inflation data released 0.1% lower than forecast at 2.3%.  This continues the idea that the ECB will be cutting rates again at their next meeting.  As to JGBs, they are unchanged yet again, seemingly affixed at 1.50%.

Commodity prices show oil (-0.2%) continuing yesterday’s decline.  From the time I wrote to the end of the session, WTI fell $2/bbl, perhaps on the idea that the Putin/Trump phone call was bringing the war closer to an end.  Regardless, if economic activity is slowing, that will lessen demand everywhere, a clear price negative.  As to gold (+0.25%) it continues to trade higher undaunted by any news on any front.  While silver is little changed this morning, copper (+0.7%) has now crested $5.00/lb and is pushing to the all-time highs seen back in May 2024.

Finally, the dollar is rallying this morning, higher against all its G10 counterparts by between 0.2% and 0.4%.  This looks to me like a trading correction, not a new trend.  The same price action is true in the EMG bloc with one real outlier, TRY (-4.2%) which actually traded down by as much as -10% earlier in the session (see chart below) on the news that President Erdogan had his key political rival, Istanbul mayor Ekrem Imamoglu, arrested on charges of fraud and terror, while his university diploma was revoked, seemingly in an effort to prevent him from running for president in the future.  Thank goodness we never have things like that happen in this country!

Source: tradingeconomics.com

There is no data released today other than EIA oil inventories where a modest net build across products is currently expected.  So, until the Fed, I would anticipate very little net movement.  After that, it all depends.  However, Powell will need to by extremely hawkish to shake any of my view that the dollar is headed lower overall.

Good luck

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Not Fraught

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The Retail Sales data did nought
To clarify anyone’s thought
‘Bout growth or inflation
While anticipation
Of Jay, for a change, is not fraught
 
Meanwhile, tariffs are, once again
A question of how much, not when
Just two weeks from now
The president’s vow
For more, has disturbed market zen

 

In a remarkable situation, at least these days, there is precious little new news impacting financial markets.  Perhaps that is why equities around the world are rallying, the absence of bad news is seen as good.  Here in the States, the biggest story continues to be the controversy over the deportation of several hundred Venezuelan and Salvadorean gang members that some claim ignored a judge’s order.  I’m confident this will get top billing for at least another day, but after that, we will move on.  However, market related stories are sparser.

For instance, we can look at yesterday’s Retail Sales data, which was not terrible, but not great, as the headline number rose a less than expected 0.2%, but that still translated into 3.1% growth Y/Y.  One of the things weighing on the data was the fact that gasoline prices fell, thus despite modest growth in volume, total dollar sales declined.  The same was true with autos, where allegedly prices declined though volumes remained solid.  (Remember, Retail Sales measures the dollar value of sales, not the quantity of items sold.). At any rate, investors absorbed the data and decided that the recent market declines, to the extent they are a reflection of concerns over rapidly slowing economic activity, were overdone.  The result, happily, is that equities rallied most of the day yesterday and that has followed through around the world overnight.

Alas, the other string of stories in headlines today is the Trump administration’s efforts to determine exactly how they want to implement the promised reciprocal tariffs which are due to be put in place on April 2.  It seems the fact the US trades with over 180 nations, each with their own tariff schedules, makes the details of the proposal difficult to shape and implement.  However, my take is, absent some major shifts by other nations, these tariffs will be imposed.

Ultimately, given the US is the ‘buyer of last resort’ for pretty much every other nation on earth with regards to any of their exports, I expect that there will be a number of nations that choose to adjust their own schedules rather than have diminished access to the US market.  But ex ante, there is no way to determine which nations will blink.

As a testament to just how much things have changed in the market, and just as importantly, the market narrative, the fact that three major central banks are meeting this week with the potential to adjust policy, is basically a footnote.  The FOMC starts their meeting today and tomorrow afternoon they will announce rates are unchanged.  Some attention will be paid to the dot plot, to try to see if the recent discussions of patience translate into higher long-term rate expectations, but quite frankly, it is not clear to me that Chairman Powell can say anything that is going to move markets absent a surprise rate adjustment.  The Fed funds futures market continues to price in basically one rate cut each quarter for the rest of the year at this point.

But before that, this evening the BOJ will announce their latest policy updates and, not surprisingly, there is no anticipation of a move there either.  While there has been much discussion in Japan of how companies will be, on average, increasing pay by 5.46% this year, that has not resulted in any expectations for the BOJ to adjust policy in response.  And in fairness to Ueda-san and his crew, the fact that the yen (-0.3% today) has been relatively stable of late, having rebounded from its dramatic lows last summer and held a good portion of those gains, concerns over a much weaker yen have diminished.

Source: tradingeconomics.com

Looking at the chart above, while I am no market technician, there seem to be several overhead resistance levels starting with that recent trend line.  The absence of concern over a declining yen (rising dollar) will leave the BOJ on hold for a while I think.

And let us not forget Thursday morning, where the BOE will convene, also with no policy changes expected. While GDP remains desultory there, printing at 1.0% Y/Y last week for Q4, inflation refuses to fall to their 2% target and so Governor Bailey is caught between that proverbial rock and hard place.  In such a scenario, no action is the most likely outcome.

Ok, let’s turn to the overnight market activity, which has all investors excited given the fact that markets everywhere are embracing risk today.  A solid day in the US was followed by strong gains throughout Asia (Nikkei +1.2%, Hang Seng +2.5%, CSI 300 +0.3%) with the mainland a little disappointing.  There has been more discussion recently that despite some splashy headlines about more Chinese stimulus, it is less than meets the eye.  That is a view with which I agree.  The exception to this rule was Indonesia (-3.9%) which fell after concerns over slowing growth and a widening budget deficit spooked foreign investors.  In Europe, things are also bright with all markets firmly higher led by Germany (+1.2%) as continued belief in the end of the debt brake has investors anxious to take advantage of all the government spending set to come.  We shall see how that works out, but if the US is the template, it probably has some room to run.  However, all these bourses are higher this morning in a general risk-on mood.  The crimp in the story is US indices are all slightly softer this morning ahead of Housing data.

In the bond market, yields are climbing with Treasury yields up by 1bp and European sovereign yields all higher by 3bps.  Again, this seems to be focused on the mooted extra government spending which is coming down the pike, although yields have backed off the levels seen after the initial announcements as per the below.  In fact, I read a forecast this morning about German bund yields rising to 4% by the end of next year after all the borrowing.

Source: tradingeconomics.com

In the commodity bloc, gold (+0.9%) is unstoppable for now, and taking silver (+1.1%) and copper (+0.4%) along for the ride.  Whatever else is ongoing, it appears that more and more investors have decided that having some portion of their portfolios in the barbarous relic is the right trade. After all, it is higher by more than 15% just since the beginning of the year and more than 40% over the past twelve months.  Oil (+1.1%) is also managing to hold above its recent lows but continues to run into resistance below $70/bbl.  The biggest news today is that Saudi Aramco has seen its stock price falling to 5-year lows, down 50% from its highs of 2022 after cutting dividends earlier this month.

Finally, the dollar is little changed at this hour (7:45), rebounding from modest weakness earlier in the session.  The euro and pound are unchanged, and the yen remains slightly softer.  However, MXN (-0.5%) and KRW (-0.5%) are both feeling the heat of the tariff story.  In the opposite camp, CL (+0.6%) continues to benefit from the rally in copper prices.  The big picture here remains unchanged, with the dollar likely to remain on its back foot as capital flows toward Europe’s government spending bonanza and away from the US, which appears to be pushing for fiscal tightness. 

On the data front, this morning we see Housing Starts (exp 1.38M) and Building Permits (1.45M) at 8:30 then at 9:15 we get IP (0.2%) and Capacity Utilization (77.8%).  With the Fed meeting ongoing, the only headlines will come from the White House, and those are virtually random these days.  Tight fiscal and loose monetary policy tends to weaken a currency and given that is the best description of the US these days, it remains my default position.

Good luck

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Inundated

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Investors have been inundated
By news that has been unabated
There’s tariffs and war
Plus rate cuts and more
With stocks and bonds depreciated
 
Now looking ahead to today
The payroll report’s on its way
As well, later on
With nothing foregone
We’ll hear from our own Chairman Jay

 

It has certainly been an interesting week in both markets and the world writ large.  So much has happened and yet so much is still unclear as to how things may evolve going forward.  Through it all, volatility is the only constant.  To me, what has become abundantly clear is the post WWII order is being dismantled, and every nation is trying to determine its place in the future.  This is a grave threat to those who benefitted from flowery words and limited action, which covers a wide swath of government leaders around the world.  I’m not sure if this is the 4th Turning, or if this is merely the prelude, with the impacts of all these changes what brings the 4thTurning about.  Regardless, history is clearly in the making.

I do not have the bandwidth to continuously follow the tariff story, although yesterday’s news was there will be more delays for both Canada and Mexico.  China received no such relief and at their National People’s Congress they seemed resolute in their pushback and highlighted their own achievements.  The data from China, though, tells me that their goals for more domestic consumption remain far in the distance.  Last night they reported their Trade Balance for the January/February period (they always combine because of the Lunar New year disruptions) and it jumped to $170.5B, far greater than anticipated.  While exports underperformed slightly, growing only 2.3% compared to a 5% estimate, it was the imports that really tells the story.  Imports fell -8.4%, a significant shortfall from both last year and consensus estimates, and an indication that the Chinese consumer is not yet the type of force that President Xi would like to see.  

In fact, a look at the chart below showing imports for the past 10 years demonstrates that very little has changed on this front.  As I wrote yesterday, converting a mercantilist economy into a consumer-focused one is a huge lift, and one that the CCP has not yet figured out.  It is not clear that they ever will.  Meanwhile, the obvious explanation for the huge jump in the trade balance was companies pre-ordering things to get ahead of the tariffs.

Source: tradingeconomics.com

Moving on to the Ukraine situation, while yesterday’s news was of the “whatever it takes” moment for defending Europe, this morning it seems there are some caveats attached.  Of course, the first caveat is the changing of the German constitution to allow them to spend all that money.  The second seems to be that not every European nation is on board for the massive spending increase and continuation of the war.  There are many political and financial hurdles to overcome in this story in Europe, and this morning’s European equity markets are indicative of the idea that this is not a straight-line higher.  In fact, every equity market in Europe is lower this morning, led by the DAX (-1.5%) although with solid declines elsewhere as well (CAC -1.0%, FTSE 100 -0.5%).  This, too, is a story with no clear end in sight.  One unconfirmed story I saw was that the group convened by the UK last weekend has not been able to agree terms for additional support.

Meanwhile, yesterday the ECB cut their short-term rates by 25bps, as widely expected, with the Deposit Rate now down to 2.50%.  The funny thing is nobody really noticed.  This is of a piece with my observation that central bankers just don’t have that much sway on market activity these days, it is all about politics and statecraft, not monetary policy.  This morning, Eurozone GDP for Q4 was released at 0.2%, a tick higher than forecast but still lower than Q3’s 0.4%.  There is no doubt the financial mandarins of Europe are keen to get this defense spending going, because otherwise they will continue to preside over a stagnant economy.  

But here’s an interesting thing to consider.  Germany has made a big deal about this new willingness to spend €500 billion outside the bounds of their budget framework on defense.  However, they continue with their Energiewende policy which has been the Achilles Heel of the German economy and will prevent them from actually producing armaments if they seek to continuously reduce fossil fuel powered energy for renewables.  It is almost as if this is theater, rather than policy, but that may just be my cynicism speaking.

Moving on to the US, this morning brings the Payroll Report with the following current median estimates:

Nonfarm Payrolls160K
Private Payrolls111K
Manufacturing Payrolls5K
Unemployment Rate4.0%
Average Hourly Earnings0.3% (4.1% Y/Y)
Average Weekly Hours34.2
Participation Rate62.6%

Source: tradingeconomics.com          

As well, we hear from Chairman Powell at 12:30pm, along with Bowman, Williams and Kugler in the hours leading up to that.  But again, I ask, do they matter to the markets right now?  Certainly, there is much discussion that the US economic data is starting to show more weakness, and there are many who are saying that long-anticipated recession is going to become evident.  If that is the case, we could certainly see the Fed cut rates, but again, my take is markets are far more attuned to 10-year yields than Fed funds.  And remember, while 10-year yields are clearly quite inflation sensitive, what we also know that questions over budget deficits and supply are critical to their pricing as well.  This was made evident yesterday in Germany.

I have glossed over market activity overnight so will give a really short update here.  Yesterday’s weakness in the US was followed by broad weakness throughout Asia, with most markets there lower on the day, notably Japan (-2.2%), but declines almost everywhere.  We have already discussed European bourses and at this hour (7:30) US futures are basically unchanged ahead of the data.

In the bond market, Treasury yields are slipping back -3bps this morning and we are seeing similar price action across most of Europe although Spain (+1bp) is bucking the trend on some domestic issues.  It is easy to believe that the Germany story was a bit overblown, and remember, if they cannot change the constitution, I expect a rally in Bunds (lower yields) along with a selloff in the DAX and the euro.

Speaking of the euro, it is continuing its sharp ascent, up another 0.6% this morning.  however, something to keep in mind regarding all the huffing and puffing about the euro is that with this sharp move higher in the past week, it is merely back to the middle of its 3-year trading range.  So, is this as big a deal as some are saying?

Source: tradingeconomics.com

But the overall currency picture is more mixed with both AUD (-0.6%) and NZD (-0.5%) lower along with CAD (-0.2%).  There are other gainers (GBP +0.2%, SEK +0.7%) and other laggards (ZAR -0.2%) although I would say the broad direction is still for dollar weakness.  

Finally, oil (+1.5%) is bouncing this morning, although this could well be a trading bounce as I have seen no new news on the subject.  I guess the delay on Canadian tariffs probably played a role as well.  Gold (+0.4%) is also firmer although both silver (-0.4%) and copper (-1.2%) are lagging.  In fairness, the latter two have had significant up weeks so are likely seeing some profit taking.

Once again, I will remark that for those who have real flows and exposures, the current market situation is why hedging is critical to maintain financial performance.  Nobody really knows where anything is going to go, but right now, it feels like the one thing we know is prices will not remain where they currently are for very long.

Good luck and good weekendAdf

Things Are Creaking

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Before Mr Trump started speaking
The Chinese explained things are creaking
As growth there is slow
So now they will blow
More funds to achieve what they’re seeking

 

The Chinese government has outlined a very active agenda for 2025 as the current pace of growth in their economy remains sluggish at best.  They continue to focus on a 5% headline GDP target and have promised to increase the budget deficit by a similar amount, so the idea of organic growth seems to be dead.  They reiterated their plan to recapitalize the big banks with CNY 500 billion and are looking to raise defense spending by 7.2%.  Long term debt issuance will increase with CNY 1.3 trillion planned for this year and they talk about adding 12 million urban jobs.  It all sounds fantastic.
 
But will it work?  Of course, there is no way to know yet, but if history is any guide, the mercantilist structure of the Chinese economy remains extremely difficult to overcome and replace with a more consumer-focused economy.  The property market there remains in terrible shape and that continues to be a drag on the overall economy as individuals, who had been encouraged to invest in property as a means of creating a retirement nest egg find themselves with much less disposable income and an illiquid and depreciating asset.
 
President Trump’s tariffs are not going to help them at all, but it is unclear if they will be significantly detrimental.  While I would not bet against China reporting 5% GDP growth in 2025, given the questionable reliability of their data, it is not clear it will be reflective of the state of the nation.
 
My take on market impacts are as follows: Chinese yields will climb as more debt is issued while growth will allegedly increase, Chinese equities should benefit If they are successful at getting things moving, but the yuan will have a harder time in my view, as capital flows to the nation remain stunted.  Of course, much will also depend on the evolution of US policy, which has been erratic, to say the least.

Said Trump, It’s a “new golden age”
As finally, we turn the page
On four years of waste
And so, we’ll make haste
With changes despite Dem outrage

Of course, the other big news was last night’s speech by President Trump to a joint session of Congress where he outlined both the many things he has accomplished in the first 6 weeks of his presidency, but also his plans for the rest of the time.  While many are still reeling from the speed with which changes are being made, there was no indication that his pace is going to slow.

Mr Trump did acknowledge that there may be some short-term pain as the economy adjusts to the changes he has wrought, but he remains focused on the long-term and how to achieve a strong economy with a far better balance sheet and a smaller government.  The implication is that he is still the avatar of volatility, and that aspect will not be changing.

Let us, though, take a step back and look at a much bigger picture.  For the past seventeen years, the US economy was the clear leader in global growth with massive government spending and budget deficits incurred to drive the process.  Meanwhile, while most of the rest of the world exited the pandemic with a burst of reopening growth, they have all lagged the US.  The chart below shows the ratio of the MSCI US index / MSCI World index and demonstrates that investment into the US, following that leading growth profile, has been historic in its effects.

Source: longtermtrends.net

But that situation seems to be changing.  President Trump is openly seeking to reduce the size of the US government and withdraw spending on many foreign adventures while the rest of the world is doing the opposite.  As per the above, China has just announced significant new stimulus.  As well, Europe, now that they need to become more responsible for their own defense, has also announced a major spending plan to rearm themselves.  This is the real sea change, I think, and the one that is going to have the biggest medium and long-term impacts on markets everywhere.  Changes in the level of capital flows and changes in trade patterns are going to significantly impact the value of the dollar as well as stocks, bonds and commodities.  It is a brave new world, so attention must be paid.

In the meantime, let’s see the markets’ initial response to the recent spate of news.  The tariff news has served to undermine US equities for the past two sessions and is still dragging on some markets, but the new spending promises are the new drivers.  So, in Asia, while the Nikkei (+0.2%) managed only a modest rally, the Hang Seng (+2.8%) exploded higher on the Chinese stimulus story although surprisingly, the CSI 300 (+0.5%) did not do nearly as well.  But elsewhere in the region, it was mostly large gains with Korea, India, Taiwan, Indonesia and Thailand all rallying more than 1%.  The laggards were Australia and New Zealand, which seemed to focus on the negatives of tariffs.

In Europe, Germany’s DAX (+3.4%) is the beneficiary of most of the mooted defense spending as not only are there quite a few defense focused firms, but rumors are that the government is going to coopt the auto manufacturers into building defense equipment (shades of WWII).  As well, the rest of the continent is flying (CAC +1.9%, IBEX +1.6%) and even the UK (+0.45%) is benefitting although there is growing concern that the BOE is not going to be aggressively cutting rates to support the economy because of still sticky inflation.  As to US futures, they are bouncing this morning and higher by 0.4% at this hour (7:00).

In the bond market, while Treasury yields rebounded from their recent lows yesterday, gaining 9bps on the day, this morning they are unchanged.  However, a look at European sovereigns tells the story of investors anticipation of a big uptick in new issuance to fund that defense spending.  The picture below is that of German yields, as an example, showing its 20bp rise this morning, but the entire continent has seen yields rise by at least 16bps!

Source: tradingeconomics.com

The market clearly believes the Europeans are going to move forward!

In the commodity markets, oil (-1.6%) remains under pressure as despite the mooted fiscal stimulus, there continues to be more concern over excess supply than newly created demand.  The below chart is quite interesting as a history of long-term price activity in oil with the interpretation that if we are near the supply destruction level, the future for prices is likely to be bullish.  Something to keep in mind. (as an aside, Josh_Young_1 is an excellent follow on X for oil ideas and information.)

As to the metals markets, gold is little changed but copper (+4.7%) has clearly gotten excited over the Chinese stimulus as well as the European defense spending, where copper will be an important piece of the puzzle.

Finally, the dollar is under substantial pressure this morning vs. both G10 and EMG currencies.  Given the yield changes, and my view that 10-year yields have become the FX driver, rather than short-term rates, it should be no surprise that the euro (+0.6%) is rallying to levels not seen since November.  The pound (+0.3%) is following suit, also making 5-month highs.  But the really impressive moves are in the peripheral European currencies with SEK (+1.1%) and PLN (+1.1%) both trading back to levels not seen since September.  On the tariff front, both MXN (+0.25%) and CAD (+0.1%) are lagging the main move but still managing a very modest rally v. the greenback.

In this brave new world, where the US is not the fiscal profligacy leader, but that role is assumed by others, my sense is that the dollar may well have topped for a much longer-term period.  While at the beginning of the year I was confident that the dollar would outperform, the policy changes we have seen since then have altered my views.  While volatility will still be rampant, I believe the broad direction will be a lower dollar going forward.

On the data front, this morning brings ADP Employment (exp 140K) as well as ISM Services (52.6) and Factory Orders (1.6%).  Then we see the EIA oil inventories where a small draw is expected and at 2:00pm, the Fed’s Beige book.  Perhaps the best thing about the changing world order is that central banks are losing some of their market power.  As I wrote yesterday, perhaps US rates are destined to fall as both the president and Chair Powell are keen to see that happen.

At this point, I think the dollar may have seen its highs for quite a while.  Remember, FX trends tend to be very long-term in nature.  For those of you who are payables hedgers, keep that in mind going forward.

Good luck

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Recession in Sight

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There once was a policy view
That tariffs, we all should eschew
But President Trump
Explained on the stump
To this idea, he wouldn’t hew
 
And so, as the clock struck midnight
Trump’s tariffs once more saw the light
Most analysts say
The tariffs will weigh
On growth, with recession in sight

 

By now you are all aware that as of 12:01 EST this morning, 25% tariffs have been imposed on all imports from both Canada and Mexico except energy products, which have seen 10% tariffs imposed.  As well, all Chinese imports have been hit with an additional 10% tariff.  Once again, President Trump has proven to be a man of his word, promising these tariffs during his election campaign and imposing them now.

The mainstream view is that these tariffs are a disaster and will send the economy into a recession.  In fact, the International Chamber of Commerce said a depression was likely.  As well, there is much concern that inflation will rise during the recession, which for Keynesians must be a very difficult concept to grasp given their strongly held belief that a recession will result in declining inflation.

Now remember, I am just a poet, so please take that into account when I offer my views here.  First, we have no idea how things will play out.  The one thing about which I am extremely confident is that there will be numerous behavioral changes by everyone because of these tariffs.  The first question is who will absorb the cost of the tariffs.  Remember, essentially the definition of a recession is that demand is declining.  Will companies be able to pass through the higher costs?  In some instances, they likely will, but in others probably not.  Anecdotally, there was a story in the WSJ that Chipotle will see its costs rise because of the tariff on avocados from Mexico but will not change their prices to account for that.  I’m confident they are not the only company who will absorb those costs.

However, there will certainly be companies that believe they can raise prices and maintain their sales and will try to do that.  My point is each company will evaluate the environment under which they operate and respond in the profit-maximizing manner, but each company’s scenario will be different.

Second, let’s consider the reason that President Trump is such a strong believer in tariffs.  He sees them as the stick to achieve his goals.  I would argue there are two goals in sight.  With Canada and Mexico, he is still unsatisfied with their efforts on the border and with fentanyl smuggling and is very keen to push that to completion.  However, the broader goal is to return manufacturing to America from its decampment overseas, mostly to Southeast Asia, during the past forty years.  And remember, he is seeking to implement a carrot as well, looking to cut corporate taxes to 15% going forward, which would put the US in the lowest quartile of corporate tax rates in the world.  While this morning the headlines are all about the tariffs and their potential destruction, just yesterday, Taiwan Semiconductor announced they would be investing $100 billion to build new fabrication plants in Arizona.  That is exactly the response Trump is seeking.

We all recognize that the world today is very different than it was even two months ago as President Trump has taken an extraordinary number of steps to implement the ideas upon which he was elected.  Interestingly, a large majority of the public remains strongly in his camp with approval ratings for many of his policies well above 60% and as high as 80%.  While markets are clearly unhappy as they have no idea how things will play out, and companies are now faced with far more uncertainty as they attempt to plan for their future, there is no reason to believe this process is going to change anytime soon.  

Keep one other thing in mind, unlike Trump’s first term in office, where he was constantly touting the strength of the stock market as a vote of confidence, this time around he and Treasury Secretary Bessent have been entirely focused on the 10-year yield and getting that rate down.  After a 7bp decline yesterday, he has been successful there. (see chart below) I would be surprised if Trump speaks about the stock market much at all for a while.

Source: tradingeconomics.com

With that in mind, let’s see how markets have been handling the tariff imposition.  After yesterday’s rout in the US, where a higher open morphed into a sharply lower close on the day, we saw red throughout Asia (Nikkei -1.2%, Hang Seng -0.3%, CSI 300 -0.1%) and Europe (DAX -2.1%, CAC -1.2%, IBEX -2.3%).  In fact, it is far harder to find a market that has rallied at all, although US futures at this hour (6:40) are pointing slightly higher.  However, after the sharp declines, an early bounce is not uncommon though not necessarily a harbinger of activity for the day.  All of this makes sense as public companies are likely going to see impacts on their profitability either because of reduced sales or reduced margins, or both, with tariffs now in place.  (Well, private companies are going to feel the same pressures, but there are no markets for them to worry about.). The worry for investors is given the extremely high price multiples that currently exist across so many companies, margin pressures can be problematic for stock prices.  For the near term, it is easy to make the case that equities have further to fall.

In the bond market, after yesterday’s Treasury yield decline, there has been a modest 1bp bounce, although as per the above chart, the trend remains lower.  In Europe, the news just hit the tape that the Eurozone is creating a plan to rearm the continent allowing for European countries to exceed debt restrictions to enable them to borrow and spend the money on this task.  The mooted amount is €800 billion, meaning that markets can expect that much new debt issuance across the continent in the coming months and years.  However, it appears investors are viewing the situation overall and are far more concerned with potential slowing growth than on increased issuance as yields have slipped one or two basis points across all nations in Europe.  Perhaps that is a signal that there is little belief in the likelihood of this new plan coming to fruition.

In the commodity markets, oil (-1.4%) continues its slide as a combination of worries over future growth due to the US tariffs and the OPEC+ announcement that they would start to bring production back online beginning in April (just 138K bbl/day, but the signal is quite clear that more is on the way) has traders unnerved.  Certainly, this is part of what President Trump is seeking, lower oil prices to help keep a lid on inflation, and there is no doubt he has pressured OPEC+ on the issue.  Remember, too, that if gasoline prices fall at the pump, that is a key driver of inflation perceptions for everyone.  As to the metals markets, we are seeing a split this morning with precious (Au +1.0%, Ag +0.65%) rallying on uncertainty and fear while copper (-1.2%) seems to be suffering on recession fears.

Finally, the dollar is lower again this morning with the DXY breaking back below 106 for the first time since early December as a signal of the broad trend.  This is interesting as the textbooks claim that if the US imposes tariffs, the dollar will strengthen, or more accurately other currencies will weaken, to offset those tariffs, and yet this morning CNY (+0.55%) and CAD (+0.45%) are bucking that trend although MXN (-0.2%) is behaving as most would expect.  But the dollar’s weakness is broad based, and my take is given the movement in interest rates, which are suddenly declining far more rapidly than anticipated just a week ago (Fed funds futures are now pricing in 75bps of cuts this year with a 11% probability of a cut in March, up from 2% last week) the dollar bull case is under real pressure.  I have maintained all along that if the Fed reignited their easing policy, the dollar would suffer.  Funnily enough, despite any angst between Chairman Powell (remember him?) and President Trump, they both may see lower rates as their preferred outcome.  In that case, the dollar has further to fall.

There is no hard data set to be released today although we do hear from NY Fed President Williams this afternoon.  This could be the first hint that the Fed’s caution is abating, and further rate cuts are in store.  Of course, with Powell on the calendar for Friday, if there is a change in tone, most market participants will be waiting to hear it from him.

The watchword has shifted from caution to uncertainty.  The tariffs have thrown sand into the gears of the economy and markets.  It remains to be seen how much impact they will have, but for now, fear is rising although the dollar is not following suit.  I think Trump must be happy, but I’m not sure how many in the markets are.

Good luck

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I Am Your Savior

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Investors are showing concern
‘Bout tariffs and Trump, so they spurn
The riskiest stuff
But that’s not enough
To help generate a return
 
Seems most of the holdings in favor
Are no longer risk takers’ flavor
How long before Jay
Will finally say
QE is here, I am your savior

 

Have you bailed out on your risk exposures yet?  Because if not, it certainly seems you are behind the curve!  At least, that’s what it feels like this morning as trepidation underlies every player’s market activity.  Based on the commentary, as well as the Fear & Greed Index, you might think we are in a depression!

Source: cnn.com

But are things really that bad?  I know that the past week has seen a modest drawdown in equity prices, but after all, on February 20th, they reached yet another new all-time high, at least as per the S&P 500.  Since then, as you can see below, the decline has been less than 5%.  And while the market has traded below its 50-day moving average (blue line), a key technical indicator, it remains well above both the 200-day version of the same (purple line) and the longer-term trend line.  My point is it feels like the narrative is overstating the magnitude of the move thus far.

Source: tradingeconomics.com

Is this the beginning of the end?  While you can never rule that out, as major corrections can occur at any time, I have no reason to believe this will be the case.  Much has been made of yesterday’s Initial Claims print at 242K, much higher than forecast as a harbinger of future economic weakness.  However, looking at the past 3 years of weekly data here, while certainly in the upper levels of readings, it is not nearly the only occurrence and not nearly the highest reading.

Source: tradingeconomics.com

One data point does not make a trend and to my eye, looking at this chart, there is no discernible trend in either direction.  Yet part of the narrative evolution is that the DOGE cuts in government jobs, along with all the headline spending cuts, is setting the economy up for much slower growth in the short run.

In fact, this issue goes back to one about which I wrote several days ago here regarding the impact of government spending on actual economic activity.  The current view of economic activity includes government spending.  If President Trump’s goal is to reduce that spending, regardless of the net long-term benefits of such actions, GDP readings are going to decline initially.  Yes, there will be more productive use of capital with less regulation and less government, but that will take some time to become evident.  In the meantime, weaker economic activity is likely to be the outcome.

I have frequently written that there has not been a market clearing event since, arguably, October 1987, when equity markets plunged and erased significant excess and speculation.  Alas, newly minted (at the time) Fed Chair Greenspan stepped in and promised to support markets with ample liquidity the next day which opened the way for far more Fed intervention in markets leading up to Ben Bernanke and the first QE programs in the wake of the GFC in 2009 and every QE version since then.  While the movement so far does not remotely indicate the end of the world, based on the Fed’s history, once equity markets correct about 20%, they tend to become far more active in supporting the markets economy.  Will this time be different?  Given the Fed’s seeming underlying desperation to cut rates to begin with, my take is if the correction reaches 15% – 20%, we will see just that.

To sum things up, risk assets are under pressure on the basis of 1) excessive valuations, 2) the Trump efforts to reduce wasteful spending (which while wasteful is still spending and counted as economic activity), and 3) the idea that Trump’s imposition of tariffs is going to dramatically raise inflation and slow growth further.  Given the mainstream media’s inherent hatred of the president, they will certainly be playing up this theme for as long as they can as they try to force Trump to change tack.  But Trump, and Treasury Secretary Bessent, have been clear that their concern is 10-year bond yields, and getting them to lower levels.  A natural corollary of the current risk-off sentiment is that bond yields tend to decline.   Look at the chart below which shows that since Trump’s inauguration, 10-year yields are down nearly 40bps.  I would argue that Trump and Bessent are perfectly comfortable with the market right now.

Source: tradingeconomics.com

Ok, let’s move on to the overnight activity.  Sticking to the bond theme, while Treasuries, this morning, are unchanged, they did decline all yesterday afternoon and this morning European sovereigns are all lower by -2bps.  As well, JGB yields have also slipped by -3bps as we are seeing risk aversion evident all around the world.  Of course, the problem with all G10 nations (Germany excepted) is that they all have very high debt/GDP ratios and in Europe, especially, this is a problem as they have begun to realize they need to spend a great deal more on defense than they have in the past.  And all that spending is going to be funded by more borrowing.  The tension between additional issuance driving yields higher and risk aversion driving yields lower is going to be the theme of European bond markets for a while.

In the equity world, it is not a pretty picture anywhere in the world.  After yesterday’s US rout, with the NASDAQ (-2.8%) leading the way lower, Asian bourses were all in the red.  Japan (-2.9%), Hong Kong (-3.3%), China (-2.0%), Korea (-3.4%), India (-1.9%)… the list goes on across the entire region with only New Zealand (+0.5%) bucking the trend on some better than expected local earnings and consumer confidence data.  European markets, though, are in a bit better shape as they suffered yesterday and are consolidating those losses this morning with most markets trading +/- 0.3% on the session.  We have seen a lot of European inflation data this morning, most of it lower than forecast which has encouraged the view that the ECB will be cutting rates more aggressively going forward.  US futures, too, are higher at this hour (7:00), on the order of 0.5% as they bounce from yesterday’s, and truly the past week’s, declines.

In the commodity markets, oil (-1.25%) is back under pressure and back under $70/bbl.  The latest fear is that slowing economic activity around the world will reduce demand for the black sticky stuff and drive prices lower still.  Remember this, oil supply is restricted not by geology, but by politics.  As nations determine that cheaper energy is critical to their future, expect to see more effort to produce more oil.  Meanwhile, metals markets are also under pressure with gold (-0.5%) still falling despite its ostensible risk profile.  However, the barbarous relic remains well above $2800/oz and I continue to believe that this correction is just that, and not the reversal of a trend.  Too many things are happening around the world to induce more fear and in that scenario, gold is the oldest store of value around.  The rest of the metals complex is also under pressure with copper (-1.2%) slipping back a bit.  It is important to remember, though, that despite the recent declines, all the major metals are still nicely higher on the month.  

Finally, the dollar is a bit firmer again this morning after a rally yesterday as well.  In classic risk-off fashion, investors flocked to the dollar, arguably to buy Treasuries.  So, we are seeing weakness in NZD (-0.6%), JPY (-0.4%) and CHF (-0.3%) in the G10 and weakness in KRW (-0.5%), ZAR (-0.2%) amongst others in the EMG bloc.  Here the story remains the impacts of Trump’s tariffs and how they will be applied, if they will be applied, as well as a general fear factor which tends to help the dollar.  Consider, too, ideas that the ECB is going to cut rates will not help the single currency.

On the data front, this morning brings Personal Income (exp +0.3%), Personal Spending (0.1%), and the PCE data where Headline (0.3%, 2.5% Y/Y) and Core (0.3%, 2.6% Y/Y) will be the most important data points.  As well, we will see Chicago PMI (40.6) which has been below 50.0 in every month but one since August 2022.  

There is no question that the economic data has been softening lately.  We saw that with the Citi Surprise Index as well as the continuous stream of commentary by the economic bears who point to underlying pieces of data that point in that direction (whether housing or employment indicators and the recent weak PMI data).  

Consider this, an early recession in Trump’s term can be blamed on the Biden administration as well as set things up for future growth, certainly in time for the mid-term elections.  As well, it will likely help reduce the yield on the 10-year, an explicit goal.  This scenario likely means short-term weakness with an eye to longer term growth.  The dollar is likely to benefit early on, at least until the Fed steps in.

Good luck and good weekend

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Eyes Like a Bat

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The new Mr Yen
Is watching for excess moves
With eyes like a bat

 

While every day of this Trump presidency is filled with remarkable activity at the US government level, financial markets are starting to tune out the noise.  Yes, each pronouncement may well be important to some part of the market structure, but the sheer volume of activity is overwhelming investment views.  The result is that while markets are still trading, there seem to be fewer specific drivers of activity.  Consider the fact that tariffs have been on everyone’s mind since Trump’s inauguration, but nobody, yet, has any idea how they will impact the global macro situation.  Are they inflationary?  Will sellers reduce margins?  Will there be a strong backlash by the US consumer?  None of this is known and so trading the commentary is virtually impossible.

With that in mind, it is worth turning our attention this morning to Japan, where the yen (-0.4%) has been steadily climbing in value, although not this morning, since the beginning of the year as you can see from the chart below.

Source: tradingeconomics.com

Amongst G10 currencies, the yen is the top performer thus far year-to-date, rising about 5%.  Arguably, the key driver here has been the ongoing narrative that the BOJ is going to continue to tighten monetary policy while the Fed, as discussed yesterday, is still assumed to be cutting rates later in the year.  

Let’s consider both sides of that equation.  Starting with the Fed, just yesterday Atlanta Fed president Bostic explained to a housing conference, “we need to stay where we are.  We need to be in a restrictive posture.”  Now, I cannot believe the folks at the conference were thrilled with that message as the housing market has been desperate for lower rates amid slowing sales and building activity.  But back to the FX perspective, what if the Fed is not going to cut this year?  It strikes me that will have an impact on the narrative, and by extension, on market pricing.

Meanwhile, Atsushi Mimura, the vice finance minister for international affairs (a position known colloquially to the market as Mr Yen) explained, when asked about the current market narrative regarding the BOJ’s recent comments and their impact on the yen, said, “there is no gap with my view.  Amid high uncertainty, we have to keep watching the impact of any speculative trading on, not only the exchange market, but also financial markets overall.”  

If I were to try to describe the current market narrative on the yen, it would be that further yen strength is likely based on the assumed future narrowing of interest rate differentials between the US and Japan.  That has been reinforced by Ueda-san’s comments that they expect to continue to ‘normalize’ policy rates, i.e. raise them, if the economy continues to perform well and if inflation remains stably at or above their 2% target.  With that in mind, a look at the below chart of Japanese core inflation shows that it has been above 2.0% since April 2022.  That seems pretty stable to me, but then I am just a poet.

Source: tradingecomnomics.com

Adding it all up, I feel far better about the Japanese continuing to slowly tighten monetary policy as they have a solid macro backdrop with inflation clearly too high and looking like it may be trending a bit higher.  However, the other side of the equation is far more suspect, as while the market is pricing in rate cuts this year, recent Fed commentary continues to maintain that the current level of rates is necessary to wring the last drops of inflation out of the economy.

There is a caveat to this, though, and that is the gathering concern that the US economy is getting set to fall off a cliff.  While that may be a bit hyperbolic, I do continue to read pundits who are making the case that the data is starting to slip and if the Fed is not going to be cutting rates, things could get worse.  In fairness to that viewpoint, the Citi Surprise Index is pointing lower and has been declining since the beginning of December, meaning that the data releases in the US have underperformed expectations for the past two months. (see below)

Source: cbonds.com

However, a look at the Atlanta Fed’s GDPNow estimate shows that Q1 is still on track for growth of 2.3%, not gangbusters, but still quite solid and a long way from recession.  I think we will need to see substantially weaker data than we have to date to get the Fed to change their wait-and-see mode, and remember, employment is a lagging indicator, so waiting for that to rise will take even longer.  For now, I think marginal further yen strength is the most likely outcome as we will need a big change in the US to alter current Fed policy.

Ok, let’s see how markets have behaved overnight.  Yesterday saw a reversal of recent US equity performance with the DJIA slipping while the NASDAQ rallied, although neither moved that far.  In Asia, the Nikkei (+0.3%) edged higher as did the CSI 300 (+0.2%) although the Hang Seng (-0.3%) gave back a small portion of yesterday’s outsized gains.  The rest of the region, though, was under more significant pressure with Korea, Taiwan, Indonesia and Thailand all seeing their main indices decline by more than -1.0%.  In Europe, red is the most common color on the screen with one exception, the UK (+0.35%) where there is talk of resurrecting free trade talks between the US and UK.  But otherwise, weakness is the theme amid mediocre secondary data and growing concern over US tariffs.  Finally, US futures are nicely higher this morning after Nvidia’s earnings were quite solid.

In the bond market, Treasury yields (+4bps) have backed up off their recent lows but remain in their recent downtrend.  Traders keep trying to ascertain the impacts of Trump’s policies and whether DOGE will be able to find substantial budget cuts or not with opinions on both sides of the debate widely espoused.  European sovereign yields have edged higher this morning, up 2bps pretty much across the board, arguably responding to the growing recognition that Europe will be issuing far more debt going forward to fund their own defensive needs.  And JGB yields (+4bps) rose after the commentary above.

In the commodity markets, oil (+1.1%) is bouncing after a multi-day decline although it remains below that $70/bbl level.  The latest news is that Trump is reversing his stance on Venezuela as the nation refuses to take back its criminal aliens.  Meanwhile, gold (-1.1%) is in the midst of its first serious correction in the past two months, down a bit more than 2% from its recent highs, and trading quite poorly.  There continue to be questions regarding tariffs and whether gold imports will be subject to them, as well as the ongoing arbitrage story between NY and London markets.  However, the underlying driver of the barbarous relic remains a growing concern over increased riskiness in markets and rising inflation amid the ongoing deglobalization we are observing.

Finally, the dollar is modestly firmer overall vs. its G10 counterparts, with the yen decline the biggest in the bloc.  However, we are seeing EMG currency weakness with most of the major currencies in this bloc lower by -0.3% to -0.5% on the session.  In this case, I think the growing understanding that the Fed is not cutting rates soon, as well as concerns over tariff implementation, is going to keep pressure on this entire group of currencies.

On the data front, we see the weekly Initial (exp 221K) and Continuing (1870K) Claims as well as Durable Goods (2.0%, 0.3% ex Transport) and finally the second look at Q4 GDP (2.3%) along with the Real Consumer Spending piece (4.2%).  Four Fed speakers are on the calendar, Barr, Bostic, Hammack and Harker, but again, as we heard from Mr Bostic above, they seem pretty comfortable watching and waiting for now.

While I continue to believe the yen will grind slowly higher, the rest of the currency world seems likely to have a much tougher time unless we see something like a Mar-a Lago Accord designed to weaken the dollar overall.  Absent that, it is hard to see organic weakness of any magnitude, although that doesn’t mean the dollar will rise.  We could simply chop around on headlines until the next important shift in policy is evident.

Good luck

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Positioned Quite Well

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The Fed is positioned quite well
To leave rates alone for a spell
Employment is stable
Which means they are able
To try, high inflation, to quell

 

“In discussing the outlook for monetary policy, participants observed that the Committee was well positioned to take time to assess the evolving outlook for economic activity, the labor market, and inflation, with the vast majority pointing to a still-restrictive policy stance. Participants indicated that, provided the economy remained near maximum employment, they would want to see further progress on inflation before making additional adjustments to the target range for the federal funds rate.”

I would say that this paragraph effectively summarizes the Fed’s views during the January FOMC meeting and based on the comments we have heard since, nothing has really changed much.  If anything, there appeared to be more concern over the upside risks to inflation than worries over a much weaker employment picture.  As well, there was some discussion regarding the potential of tariffs impacting prices and economic activity, although they would never be so crass as to actually use the word.

I would argue we don’t know anything more about their views now than we did prior to the Minutes.  Interestingly, they continue to believe that the current policy rate is restrictive even though Unemployment has been sliding, inflation is sticky on the high side and equity and other financial markets continue to make record highs.  Personally, I would have thought the appropriate view would be policy is slightly easy, but then I’m no PhD economist, just a poet.  If we learned anything it is that they are not about to change the way they view the world.  This merely tells me they have the opportunity to double down on previous mistakes.

It’s almost as if
Japanese markets now see
Future yen glory

Meanwhile, away from the machinations and procrastinations of the Fed, if we turn East, we can see that last night the yen, for a brief moment, traded through the key 150 psychological level, although it has since edged back higher.  This is the strongest the yen has been in more than two months and, in a way, is somewhat surprising given the strong belief that tariffs imposed against a nation will result in that nation’s currency declining.  But that is not the case right now, where despite mooted tariffs on steel, autos and semiconductors, three things the Japanese export to the US, the yen is climbing again.  

Source: tradingeconomics.com

One of the interesting things about the interest rate market’s response to the FOMC Minutes is that there continues to be an expectation of 39bps of rate cuts this year in the US.  But then, I read the Minutes as somewhat hawkish, obviously a misconception right now.  Meanwhile, in Tokyo, we continue to hear comments from former BOJ members that further rate hikes are coming and the futures market there is pricing 36bps of rate hikes by the end of this year.  So, for now, the direction of travel is diametrically opposed between the Fed and the BOJ.  Last night also saw JGB yields edge higher by another 1bp, to 1.43% and another new high level for this move.  Add it all up and the rate movements are sufficient to be the current FX drivers.

Now, as per my opening discussion regarding the Fed, while I believe that the next move should be a hike, and that gained support from a WSJ article this morning telling us to expect higher rent prices ahead which implies that the shelter portion of US inflation is not going to decline anytime soon, perhaps this is another reason to consider that the dollar may decline.  After all, the textbooks all explain that a high inflation economy results in a weaker currency.  If the Fed is truly going to continue to try to ‘normalize’ rates lower despite rising inflation, that will change my broad view of the dollar, and I suspect it will weaken dramatically.  While the yen is the first place to watch this given the opposing actions by the Fed and BOJ, it could easily spread.

Too, it is important to remember that while we have lately become accustomed to the yen trading in the 140-160 range vs. the dollar, for many years USDJPY traded between 100 and 120 as per the below chart.  While the world has certainly changed, it doesn’t mean that we cannot head back to those levels and spend another decade at 110 give or take a bit.

Source: tradingeconomics.com

Ok, with that in mind, let’s take a look at how markets have handled the new information.  Clearly US equity markets are not concerned about a Fed volte-face as they closed at yet new record highs yesterday, albeit with very modest gains of about 0.2%.  Asian markets, however, were not so sanguine with red the dominant color as the Nikkei (-1.25%) suffered amid that strengthening yen while both the Hang Seng (-1.6%) and mainland (CSI 300 -0.3%) fell despite PBOC promises of more support for the economy and the property market.  If I’m not mistaken, this is the third time the PBOC has said they will be increasing support for property markets and prices there continue to decline.  In fact, every major index in Asia fell overnight, mostly impacted by tariff fears.

Meanwhile, European bourses are all modestly firmer save the UK (-0.4%) as we see a rebound after yesterday’s declines and earnings data from Europe continues to show decent outcomes.  While there is much talk and angst over the Ukraine situation and tariffs, right now given the uncertainty of the timing of any tariffs, as well as the possibility that they may be delayed further or deals may be struck, investors seem to be laying low.  Remember, though, that European equity markets have been outperforming US markets for the past several months, although that could well be because their valuations had become so cheap, we are seeing a rotation into them for now.  As to the US markets, futures are pointing slightly lower at this hour (7:15) down about -0.25%.

In the bond market, yesterday saw Treasury yields cede their early gains and slip 2bps on the session and this morning they have fallen a further 2bps.  Meanwhile, European sovereign yields, after jumping yesterday across the board, are falling back slightly with declines on the order of -1bp or -2bps.

In the commodity market, the one constant is that the price of gold (+0.4%) continues to climb.  Whether it is because of growing global uncertainty, concerns over rising inflation, or technical questions regarding deliveries in NY, it is not clear.  Price action is not volatile, rather it has been a steady climb for more than a year.  just look at the chart below.

Source: tradingeconomics.com

As to the other metals, both silver and copper are also continuing their climb and higher by 1.0% this morning.  Oil (+0.2%) is also edging higher which seems a bit odd given the fundamental news I keep reading.  First, OPEC+ is going to begin increasing production later this year, second, the prospects of a peace deal with Russia seems likely to result in Russian oil coming back on the market sans sanctions, and third, despite talk of Chinese economic stimulus, demand from the Middle Kingdom has not been growing.  Add to this the fact that supply is expected to grow by upwards of 1mm bpd from Guyana, Brazil and Canada, and it seems a recipe for falling prices.  Just goes to show that markets are perverse.

Finally, the dollar is under pressure across the board this morning with the yen (+0.95%) leading the way but commodity currencies (AUD +0.5%, NZD +0.5%, ZAR +0.4%) also showing strength.  In fact, virtually every currency has strengthened vs. the greenback this morning.  Looking at the charts, there is a strong similarity across almost all currencies vs. the dollar and that is the dollar put in a peak back in early January and has been gradually declining since then.  This is true across disparate currencies as seen below and may well represent the market deciding that President Trump would like to see the dollar decline and will enact policies to achieve that end.  (I used USDDKK as a proxy for EURUSD since the two are linked quite closely with a correlation of about 0.99.)

Source: tradingeconomics.com 

As I wrote above, my strong dollar thesis is based on the Fed continuing to fight inflation.  If they abandon that fight, then the dollar will certainly decline!

On the data front, this morning brings Initial (exp 215K) and Continuing (1870K) Claims as well as the Philly Fed (20.0).  In addition to the Minutes yesterday we saw Housing Starts tumble although Permits were solid.  However, there is clearly some concern over the housing market writ large, with fewer first-time buyers able to afford a new home, hence the rent story above.  We have 3 more Fed speakers today but again, I ask, are they going to change their tune?  I don’t think so.  I find it hard to believe that the Fed will allow inflation to rebound sharply, but if they remain focused on rate cuts while inflation continues to creep higher, I fear that will be the outcome.  And that, as I said above, will be a large dollar negative.  We shall see.

Good luck

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Norms to Eschew

Posted on by

For market practitioners, Trump
Is more than a modest speed bump
His willingness to
Most norms to eschew
Can force long-term views to go bump
 
Meanwhile, as the markets prepare
For Powell to sit in his chair
In front of the Senate
A popular tenet
Is more rate cuts he will foreswear

 

It is very difficult to keep up with the news these days as President Trump really does address so many disparate issues in such short order, it is hard to know which ones will potentially impact markets and which will simply be headline fodder.  Obviously, the tariff discussions remain front and center, but even those plans seem to be evolving at a very fast pace, and while yesterday he did invoke 25% tariffs on steel and aluminum imports, that has literally become old news already.  The next question is what will occur with the latest idea of reciprocal tariffs, where the US will charge the same tariff on imports from other nations as those nations charge on imports from the US.

Generally speaking, US tariffs are the lowest overall around the world, which arguably is exactly what Trump wants to address.  I am not going to argue the merits or detractions of tariffs, that is pointless.  The only thing to consider is if they are implemented, what are the potential impacts.  One of the key things to remember about the effectiveness of tariffs is the price elasticity of the products being tariffed.  If, for instance, a product has substantial competition and is easily replaced, the nation being tariffed is likely going to absorb the bulk of the pain.  Consider Colombia and how quickly they caved regarding the deportations.  While I am not a coffee drinker, and I am sure there are those who believe Colombian coffee is the best, coffee also comes from Brazil, Vietnam, Hawaii and Indonesia, and as none of those nations (and obviously Hawaii) were subject to tariffs, Colombia would have paid the freight had they been implemented.

But, for a product like solar panels, where there are few suppliers other than the Chinese, to the extent the demand remained in place, the purchaser would see higher prices.  Turning to steel and aluminum, the below graphic shows the top 10 global steel producing nations and how much they produced in 2024.  This graphic says all you need to know about why President Trump is unhappy with China and their trade policies.  (well, this and the next one)

Source: worldsteel.org

And while this is not an exact apples-to-apples comparison, the below chart shows forecasts for steed demand in 2023 and 2024.  The mismatches are clear as China, South Korea and Japan have a significant surplus to export while the US and India need imports.

Source: mrssteel.com.vn

The point is President Trump is seeking to address that imbalance and is of the mind that the US would be better off if we make our own steel.  In fact, this is simply part of his entire philosophy to reshore US manufacturing capabilities.

Now, steel is a traded commodity, although in financial markets, not so much.  But changes in the flows of imports and exports will have an impact on FX markets, while tariffs could well also impact investment flows. In fact, it is not hard to see why Nippon Steel wants to buy US Steel.  if they own a steel manufacturer in the US, they can increase production with no concerns over tariffs.

Remember, too, this issue is merely a microcosm of the potential chaos that will be seen across industries and nations, both of which will impact financial markets.  Once again, I harp on the idea that a robust hedging program is a necessity these days.

Turning to today’s activities, Chairman Powell will be testifying before the Senate Banking Committee this morning.  On the one hand, I wonder if he is upset by the fact that virtually nobody is concerned about what he says these days as Trump continues to dominate every conversation.  For someone who has become quite accustomed to being the center of attention with respect to markets, this may well be a blow to his vanity and ego.  On the other hand, it is also quite possible that maintaining a low profile is precisely his strategy here, and if that is the case, I expect we will not learn anything new at all.  The Fed mantra is currently that they will be cautious before implementing any further rate cuts.  Remember, CPI is released tomorrow as well, so when he goes before the House, they will have that information in hand.  But to Powell’s benefit, Treasury Secretary Bessent made clear he and President Trump are far more concerned about the 10-year yield than Fed funds.  This may be the most amazing transformation of all, a Fed chair who becomes a wallflower!

Ok, after yesterday’s US equity rally, the story in Asia was far less positive.  Japan and Australia were unchanged while the Hang Seng (-1.1%) and CSI 300 (-0.5%) both suffered, perhaps on the tariff impositions.  Elsewhere in the region, Taiwan and South Korea both had solid sessions while weakness was evident in Indonesia, India and the Philippines.  In fact, all three of those markets have been declining steadily since October, with declines between 15% and 20% as prospects in those economies seem concerning, especially with Trump’s tariff mania.  In Europe, virtually every market is unchanged this morning as the EU quickly explained they would retaliate against any US tariffs.  Of course, that is what makes Trump’s reciprocal tariff structure so interesting.  How can Europe complain that other nations impose the same level of tariffs they do?  Meanwhile, at this hour (7:05), US futures are pointing slightly lower, about -0.25%.

In the bond market, yields are climbing with Treasuries higher by 3bps, now 12bps above the lows seen early last week, while in Europe, yields are substantially higher, with France (+10bps) leading the way, but the rest of the continent showing rises of between 4bps and 6bps.  Part of this move on the continent is driven by a catch up to yesterday afternoon’s US yield rally.  As to the French, seemingly their Unemployment Report, which showed a much better than expected 7.3%, may have investors concerned about quickening growth and inflation.  That feels like a lot, but there are no real explanations I have seen.

In the commodity markets, oil (+1.5%) is continuing to rebound off its recent lows, although still looks like it is in the middle of its trading range.  Gold (-0.7%) and silver (-1.2%) are both finally retracing some of the extraordinary rally that we have been witnessing for the past two months.  Copper (-2.7%), too, is under pressure this morning, unwinding some of its recent spectacular gains.

Finally, the dollar is very modestly softer, but not universally so.  For instance, the euro (+0.2%) and yen (-0.2%) seem to offset each other while most other G10 currencies have moved even less.  In the EMG bloc, though, INR (+0.9%) is the biggest gainer as the RBI has been intervening to address what had been an acceleration in the rupees decline in the past few weeks (see below).

Source: tradingeconomics.com

Elsewhere in the space, gains are less impressive, with moves on the order of +0.4% (PLN and HUF) or smaller.

On the data front, the NFIB Small Business Optimism Index was released at a softer than expected 102.8 as it seems the Trumpian chaos is having an effect for now.  Otherwise, the only thing is Powell and three other Fed speakers, but again, given the relative lack of discussion regarding Powell, the other three will get even less press in my view.

It is difficult to claim nothing has changed lately, but perhaps more accurately, there is no clear directional change at this point.  We need to start seeing some consistency in the policy impacts and that is likely to take months.  Until then, volatility is the watchword across all markets.

Good luck

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