Loathing and Fear

Posted on February 10, 2025 by fxpoet

On Friday, the jobs situation
Explained there was little causation
For loathing or fear
That later this year
Recession would soon drive deflation

Meanwhile, in the Super Bowl’s wake
The president’s set to forsake
Economists’ warning
That tariffs are scorning
Their views, and are quite a mistake

Let’s start with a brief recap of Friday’s employment report which was surprising on several outcomes. While the headline was a touch softer than forecast, at 143K, revisions higher to the prior two months of >100K assuaged concerns and implied that the job market was still doing well. You may recall that there were rumors of a much higher Unemployment Rate coming because of the annual BLS revisions regarding total jobs and population, but in fact, Unemployment fell to 4.0% despite an increase in the employed population of >2 million. Generally, that must be seen as good news all around, even for the Fed because the fact that they have paused their rate cutting cycle doesn’t seem to be having any negative impacts.

Alas for Powell and friends, although a real positive for the rest of us, the Earnings data was much stronger than expected, up 0.5% on the month taking the annual result to a 4.1% increase. Recall, one of Powell’s key concerns is non-core services inflation, and that is where wages have a big impact. After this data, it becomes much harder to anticipate much in the way of rate cuts soon by the Fed. This was made clear by the Fed funds futures market which is now pricing only an 8.5% probability of a rate cut in March, down from 14% prior to the data, and only 36bps of cuts all year, which is down about 12bps from before.

Securities markets didn’t love the data with both stocks and bonds declining in price, although commodities markets continue to rally alongside the dollar, a somewhat unusual outcome, but one that makes sense if you consider the issues. Inflation is not yet dead, hurting bonds, while the fact the Fed is likely to remain on hold for longer supports the dollar. Stocks, meanwhile, need to see more economic growth because lower rates won’t support them while commodities are seen as that inflation fighting haven.

Of course, it wouldn’t be a day ending in Y if we didn’t have another discussion on tariffs during this administration. The word is that the president has two things in mind, first, reciprocal tariffs, meaning the US will simply match the tariff levels of other countries rather than maintaining their current, generally lower, tariff rates. As an example, I believe the EU imposes a 10% tariff on US automobile imports, while the US only imposes a 2.5% tariff on European imports. The latter will now rise to 10%. It will be very interesting to see how the Europeans complain over the US enacting tariffs that are identical to their own.

A side story that I recall from a G-20 meeting during Trump’s first term was that he offered to cut tariffs to 0% for France if they reciprocated and President Macron refused. The point is that while there is a great deal of huffing and puffing about free trade and that Trump is wrecking the world’s trading relationships, the reality appears far different. If I had to summarize most of the world’s view on trade it is, the US should never put tariffs on any other country so they can sell with reckless abandon, while the rest of the world can put any tariffs they want on US stuff to protect their home industries. This is not to say tariffs are necessarily good or bad, just that perspective matters.

The other Trump tariffs to be announced are on steel and aluminum imports amounting to 25% of the value. This will be impactful for all manufacturing industries in the US, at least initially, so we will see how things progress. Interestingly, the dollar has not responded much here because these are not country specific, so a broad rise in the dollar may not be an effective mitigant.

Ultimately, as I have been writing for a while, volatility is the one true change in things now compared to the previous administration. Now, with that as backdrop, and as we look ahead to not only CPI data on Wednesday, but Chair Powell’s semi-annual congressional testimony on Tuesday at the Senate and Wednesday at the House, let’s look at how markets have responded to things.

As mentioned above, US equity markets fell about -1.0% on Friday after digesting the Unemployment data. However, the picture elsewhere, especially after these tariff discussions, was more mixed. In Asia, Japanese shares were essentially unchanged although Hong Kong (+1.8%) was the big winner in the region. But Chinese shares (+0.2%) did little, especially after news that the number of marriages in China fell to their lowest since at least 1986, another sign of the demographic decline in the nation. Elsewhere in the region, there was more red (India, Taiwan, Australia) than green (Singapore). European shares, though, are holding up well, with modest gains of about 0.2% – 0.4% across the board despite no real news. US futures are also ticking higher at this hour (7:10), about 0.5% across the board.

In the bond market, Friday saw Treasury yields jump 6bps with smaller gains seen in Europe. This morning, though, the market is far quieter with Treasury yields unchanged and European sovereigns similarly situated, with prices between -1bp and +1bp compared to Friday’s closing levels. Of note, JGB yields have edged higher by 1bp and now sit at 1.31%, their highest level since April 2010. With that in mind, though, perhaps a little bit of longer-term perspective is in order. A look at the chart below shows 10-year JGB yields and USDJPY since 1970. Two things to note are that they have largely moved in sync and that both spent many years above their current levels. While it has been 15 years since JGB yields were this high, they are still remarkably low, even compared to their own history. I know that many things have changed over that time driving fundamentals, but nonetheless, this cannot be ignored.

Source: tradingeconomics.com

Sticking with the dollar, it has begun to edge higher since I started writing this morning and sits about 0.2% stronger than Friday’s close. USDJPY (+0.5%) is once again the leader in the G10, although weakness is widespread in that bloc. In the EMG bloc, there were a few gainers overnight (INR +0.3%, KRW +0.3%) although the rest of the world is mostly struggling. One interesting note is ZAR (0.0%) which appears to be caught between the massive rally in gold (to be discussed below) and the increased rhetoric about sanctions by the US in the wake of the ruling party’s ostensible call for a genocide of white South Africans to take over their property. This has not been getting much mainstream media press, but it is clear that Mr Trump is aware, especially given that Elon Musk is South African by birth. However, there is no confusion in the South African government bond market, which, as you can see below, has seen yields explode higher in the past week since this story started getting any press at all.

Source: tradingeconomics.com

Finally, the commodity markets continue to show significant movement, especially the metals markets. Gold (+1.6%) is now over $2900/oz, another new all-time high and calling into question if this is just an arbitrage between London and New York deliveries. Silver (+1.4%) continues to be along for the ride as is copper (+0.6%) which is the biggest gainer of the past week, up more than 7%. Ironically, aluminum, the only metal where tariffs are involved, is actually a touch softer this morning. As to oil (+1.2%) while the recent trend remains lower, it does appear to be bottoming, at least if we look at the chart below.

Source: tradingeconomics.com

Turning to the data this week, it will be quite important as CPI headlines, but we also see Retail Sales and other stuff and have lots of Fedspeak.

Tuesday	NFIB Small Biz Optimism	104.6
	Powell Testimony to Senate
Wednesday	CPI	0.3% (2.9% Y/Y)
	-ex food & energy	0.3% (3.1% Y/Y)
	Powell Testimony to House
Thursday	PPI	0.3% (3.4% Y/Y)
	-ex food & energy	0.3% (3.3% Y/Y)
	Initial Claims	216K
	Continuing Claims	1875K
Friday	Retail Sales	-0.1%
	-ex autos	0.3%
	IP	0.2%
	Capacity Utilization	77.7%

Source: tradingeconmics.com

In addition to Powell, we will hear from five more Fed speakers, although with Powell speaking, I imagine their words will largely be ignored. Overall, the world continues to try to figure out how to deal with Trump and his dramatic policy changes from the last administration. One thing to keep in mind is that so far, polls show a large majority of the nation remains in support of his actions so it would be a mistake to think that his policy set is going to be altered. Net, the market continues to believe this will support the dollar, as will the fact that the Fed seems less and less likely to start cutting rates soon. Keep that in mind as you consider your hedges going forward.

Good luck

Adf

Rate Cuts Have Slowed

Posted on February 4, 2025 by fxpoet

The story that’s driving the news
Is one on which most have strong views
Both neighbors have claimed
Their borders are tamed
So, tariffs, the Prez, will not use

Meanwhile, data yesterday showed
That managers are in growth mode
The ISM rose
And Fed speakers chose
To validate rate cuts have slowed

The major economic story is, of course, the news that both Canada and Mexico have altered their behavior in order to prevent the imposition of 25% tariffs on their exports to the US. Both nations have now promised to police the border between themselves and the US more tightly, and it also seems that the US now has operational control, via military overflights, of the Mexican border. While there are many pundits who believe all this activity was merely theater and could have been accomplished without tariff threats, none of them are in a position of power. In the end, I think it is very difficult to conclude anything other than Trump got what he wanted and achieved it via his preferred means.

The market response was very much what you might expect. The early sharp declines in the CAD and MXN were reversed and the day ended with both currencies at basically the same levels they closed on Friday. However, as you can see from the chart below, there was clearly some excitement and panic during the session, with back and forth 2% movements.

Source: tradingeconomics.com

Here’s the thing, I think you all need to be prepared for this type of activity on a regular basis for the next four years. Certainly, there is nothing to suggest that President Trump is going to change his style and as long as he is successful in achieving his aims in this manner, he will continue with these activities. Consider this as well, no national leader wants to appear weak, especially to their electorate, and so when President Trump turns his focus to a smaller nation, those leaders are very likely to try to stand up to the pressure, at least in public. But in the end, most nations are far more reliant on the US market to buy their stuff than the other way around. After all, the US is basically the consumer of last resort globally. As such, very few nations can truthfully withstand an onslaught of this magnitude.

Now, turning to the state of the US economy, President Trump got some very positive news from the ISM data which printed at 50.9, its highest level since September 2022 and far higher than forecasts. In fact, it is not hard to look at the recent trend in this data series and believe we are going to see positive economic growth going forward

Source: tradingeconomics.com

However, the downside here was that the Prices Paid portion of the index also rose, back to 54.9, implying that inflation pressures remain extant within the economy. Now, you and I both know that is the case as we all deal with these prices on a daily basis, but until the data starts to become more obvious, it appears the Fed is always the last to know.

Speaking of the Fed, while only one speaker was on the schedule, Atlanta Fed President Bostic, we heard from three of them anyway as it remains clear to me there is a strong belief in the Marriner Eccles building that a key part of their job is to ~~never shut up~~ constantly pitch their narrative to try to keep markets in line. So, as well as Bostic, we heard from Chicago’s Goolsbee and Boston’s Collins and they all basically said the same thing, perhaps best stated by Ms Collins, “There’s no urgency for making additional adjustments. The data is going to have to tell us. At some point I certainly would see additional normalization in terms of what the policy stance is.” The last part of her comment refers to the idea that she, and truthfully all three, believe that further rate cuts remain appropriate despite the ongoing growth and continued stickiness of prices. And to think, some people believe that Trump and the Fed are not on the same page. They all want lower rates!

Ok, let’s turn to markets and see how they have behaved overnight. Yesterday, after a pretty horrible opening on the basis of tariffs, tariffs everywhere, the news that they would be postponed saw US markets rebound, although still close lower on the session. In Asia, Japan (+0.7%) rallied as so far, Japan remains out of the tariff sightlines, and Hong Kong (+2.8%) traded much higher in its first post-holiday session although mainland Chinese share trading doesn’t reopen until tonight. Elsewhere in Asia, the screens were largely green, perhaps on the thesis that tariffs are just a negotiating tactic. In Europe, the picture is more mixed with the UK (-0.2%) lagging while Spain’s IBEX (+0.8%) is the leading gainer. The rest of the continent, though, is seeing gains on the order of just 0.2%, so not much love. And at this hour (7:10) US futures are little changed.

In the bond market, Treasury yields, after edging higher by a few bps yesterday, are up another 2bps this morning and pushing back to 4.60%. In Europe, sovereign yields are also firmer this morning, up between 2bps and 4bps across the board, although this is after sharply lower yields yesterday on still weak PMI data from the continent. As well, Mr Trump is hinting that he is going to turn his tariff sights on Europe soon, so there has to be some trepidation there. After all, Europe, which is already a basket case due to self-inflicted energy-based wounds, really cannot afford a trade fight with the US, especially since they have a net trade surplus on the order of $200 billion with the US. Finally, JGB yields rose 3bps and are now at their highest level since May 2010 and look for all the world like the trend remains strongly intact as per the below chart.

Source: tradingeconomics.com

In the commodity markets, confusion in energy reigns as yesterday’s initial rally on Canadian tariff news has been completely reversed with oil (-2.1%) and NatGas (-4.2%) both falling sharply today. But what is not falling is gold (+0.1%) which made yet another new all-time high yesterday and continues to defy gravity. This has helped the entire metals complex with both silver and copper higher by 0.5% this morning.

Finally, the dollar continues its general winning ways this morning. Yesterday saw early gains, also on the tariff story, which as evidenced by the chart at the beginning of the note, reversed. But in the other currencies, the euro and pound remain under modest pressure along with Aussie, as all three are softer by about -0.3% today, with the yen (-0.4%) along for the ride. In the EMG bloc, MXN (-0.6%), BRL (-1.2%) and ZAR (-0.3%) are also under pressure as though the immediate tariff threat seems to have abated, fear remains the driving force in the space. Add to the tariff fears the fact that the US economy continues to outperform its peers, and the Fed has basically put the kibosh on any rate cuts anytime soon and it is easy to understand why money is flowing this way.

On the data front, JOLTS Job Openings (exp 8.0M) and Factory Orders (-0.7%, +0.6% ex Transport) are today’s information, and we hear from more Fed speakers. It seems clear, so far, that the Fed mantra is wait and see as things evolve under President Trump. Unless one of these speakers (Bostic, Daly, Jefferson) offers a different view, which seems unlikely, then I suspect the dollar will continue to find more support than resistance for now.

Good luck

Adf

Run Amok

Posted on February 3, 2025 by fxpoet

The price level, sadly, will jump
According to President Trump
Will Canada shrink?
Will Mexico blink?
As tariffs cause things to go thump

The first thing that moved was the buck
While stock markets were thunderstruck
So, who will blink first?
And who will hurt worst?
No matter, things have run amok

Whatever you think of the man, you must admit that President Trump knows how to maintain the spotlight on himself and his policies to the exclusion of virtually everything else in the news. And so, in the wake of two terrible aviation disasters in short order, pretty much all eyes are now focused on the tariffs that Trump imposed this weekend on Canada, Mexico and China. While there had been a large school of thought that the tariff talk was a cudgel to be used during negotiations but would never actually be imposed as they would be too damaging, that thesis has been destroyed. It appears that President Trump believes his long-term goals of reshoring significant parts of US industry and leveling the playing field with trade partners is achievable via tariff policy and will more than offset any short-term pain that may come. We shall see if he is correct, but certainly, the short-term pain is beginning to arrive.

The early movement in equity markets was uniform around the world, and it was not pretty. The below snapshot of equity futures markets, taken at 6:00am this morning shows that the only two markets that have not fallen are China and Hong Kong, and that is only because they remain closed for the Chinese New Year holidays. But there is plenty of fear all around the world, especially considering that markets throughout Europe and Japan, as well as other nations that have not been named targets of tariffs, have also fallen sharply.

Source: tradingeconomics.com

Too, the FX markets have also responded dramatically, with the dollar exploding higher vs. virtually all its counterpart currencies this morning as 1% gains are the norm.

Source: tradingeconomics.com

A special shoutout to ZAR (-1.55%) which while not directly impacted by tariffs, caught Trump’s ire by their recently enacted legislation to confiscate property as they deem fit, oftentimes without compensation. While South African officials have claimed it is akin to eminent domain rules in the US, those require compensation at all times, a not insubstantial difference.

So, what’s a hedger to do? Well, this is why you maintain a hedge program in the first place. Lots of things happen in the world, most of which are beyond any individual or companies’ control, yet the impacts are real. Some of what I have read this morning highlights the idea that Canada and Europe and Mexico are going to stick together to fight these tariffs. However, at the end of the day, the US economy, and by extension its market, is the largest by far, and losing the US as an export destination will be a very difficult pill for those nations and their economies to swallow.

My sense is that Trump, especially if he continues to address the immigration and government waste issues, will have far more runway than most other nations, especially given the precarious situation of many ruling parties right now. But the other thing to consider is that there is no going back to the way things were in the past. Alliances and treaties are going to come under much greater scrutiny by all sides as governments everywhere re-evaluate what they are trying to achieve with various policies and how they can partner with other nations to work together. In fact, I suspect that the EU is going to continue to come under even greater pressure as it becomes more evident that while many countries believe in the trade benefits of the EU, the recent focus by Brussels on other issues like climate activism and immigration run counter to some members’ views. No matter what, the world is changing dramatically, and my take is the change is going to come faster than many will have anticipated.

OK, there are a thousand stories on how the tariffs are going to impact the US, with initial calculations regarding the negative impact on GDP and how much they are going to raise inflation, so I’m not going to go there. Needless to say, the universal belief is things will get worse on those metrics. But here’s something else to consider. On Friday, the BLS will be revising the 2024 jobs data, including their population estimates and the birth/death model that describes the number of new businesses that are formed, net, each month. Early estimates show that the number of jobs created is going to fall by nearly 1 million while population, now taking into account more immigration, is going to rise. I have seen estimates that the Unemployment Rate may rise, or be revised, to 4.5% or 4.6%. If that is the case, it will certainly call into question exactly what the Fed has been doing. It will also, almost certainly, result in a Trumpian tirade about how the BLS is political and was cooking the books to burnish Biden’s economic record. I suspect it will not help equity markets if that is the case, but also probably hurt the dollar as the Fed will be right back onto their rate cutting discussions.

As I’ve already shown the equity and FX markets above, a look at bonds shows that Treasury yields are unchanged this morning, as they seem to be caught between concerns of slower growth and higher inflation due to the tariffs. Remember, too, that Wednesday, the Treasury will issue its Quarterly Borrowing Estimate with all eyes on the mix that new Treasury Secretary Bessent will be seeking as things go forward. Remember, he was quite vocal, before he took the job, as to the mistakes that Yellen made in not terming out more Treasury debt when rates were at extremely low levels. Meanwhile, European sovereign yields are all lower this morning, between -2bps (Italy) and -6bps (Germany) as PMI data released showed that though things were better than last month, they remain well below the key 50.0 level. However, on the inflation front, both Eurozone and Italian data printed higher than expected, clearly not what Madame Lagarde wants to see.

Finally, commodity markets have seen oil prices (+2.6%) rise sharply as the US will be imposing 10% tariffs on imports of Canadian oil products, while NatGas prices have jumped by 9.0% on concerns over supply disruptions from those tariffs. Like I said, the world is a different place today! In the metals markets, both gold and silver are little changed this morning although copper (-0.9%) prices are slipping, perhaps on the idea that these tariffs are going to slow economic activity. And that is one of the key belief sets amongst economists.

As to the data this week, it is reasonably busy, but all eyes will be on Friday’s NFP report, especially with the rumors of a major revision.

Today	ISM Manufacturing	49.8
	ISM Prices Paid	52.6
Tuesday	JOLTS Job Openings	8.0M
	Factory Orders	-0.8%
	-ex Transport	+0.6%
Wednesday	ADP Employment	150K
	Trade Balance	-$96.5B
	ISM Services	54.2
Thursday	Initial Claims	215K
	Continuing Claims	1855K
	Nonfarm Productivity	1.7%
	Unit Labor Costs	3.5%
Friday	Nonfarm Payrolls	170K
	Private Payrolls	140K
	Manufacturing Payrolls	-2K
	Unemployment Rate	4.1%
	Average Hourly Earnings	0.3%(3.8% Y/Y)
	Average Weekly Hours	34.3
	Participation Rate	62.5%
	Michigan Sentiment	70.9
	Consumer Credit	$10.5B

Source: tradingeconomics.com

In addition to all of this, we will hear from nine different Fed speakers, at least, over 13 different venues this week. Now, things could get quite interesting here given Chairman Powell did not speak to tariffs as they were not yet implemented when he delivered the FOMC news last week, but all of these speakers will have an opinion. I wonder if there will be a unified set of talking points or if each one will truly give their own views. Of course, given that each is a neo-Keynesian economist, I suspect their views will all be aligned anyway.

One other thing from last week that didn’t get much press is that the BOC, after cutting the base rate by 25bps as widely expected, has indicated they will be ending their QT program and, in fact, restarting their QE program over the next several months in order to grow their balance sheet in line with the economy. Do not be surprised if we see other major central banks go down this road as well, regardless of sticky inflation.

Summing it all up, the world is very different this morning compared to Friday morning. Trade and economic disruptions are going to become evident and there is still a great deal of vitriol to be vented at Trump by others, while Trump will continue to decry other nations efforts to weaken the US. As I have written in the past, volatility will be the main underlying thesis this year. Meanwhile, the beauty of a good hedge program is it helps through all market conditions. Do NOT slow things down waiting for a better entry point, be consistent, as that better entry point may not materialize for a long time. My strongest cue will be the bond market as if yields start to decline in anticipation of a significant economic slump, I expect the dollar will suffer, but if they hold up, then there is nothing to stop the dollar from testing and breaking its recent highs.

Good luck

Adf

Forked Tongue

Posted on January 31, 2025 by fxpoet

The major discussion today
Is tariffs and if they’re in play
While Trump thinks they’re great
Economists hate
Their impact and watch with dismay

Meanwhile it has not been a week
And questions are rife ‘bout DeepSeek
The most recent questions
Are making suggestions
That China, with forked tongue, did speak

President Trump has promised to impose 25% tariffs tomorrow on all Canadian and Mexican exports to the US if those nations do not agree to further efforts to tighten border security regarding the movement of both immigrants and drugs across the borders. Even within his administration, there are many who do not want to see them imposed given the potential disruption they would cause in supply chains throughout the nation. And of course, economists abhor tariffs as a pure deadweight loss to the economy. But Trump sees the world through very different eyes, that much is clear, and as evidenced by the very short-term row with Colombia last weekend, believes they can be useful tools to achieve strategic, non-economic outcomes.

This poet is not fool enough to try to anticipate what will actually happen as the mercurial nature of President Trump’s actions is far beyond my ability to forecast. However, if history is any guide, we will see both Mexico and Canada make some additional concessions and an announcement that because of that, the tariffs will be delayed until negotiations can be completed by some new deadline. (Well, maybe I am fool enough 🤣)

From our perspective observing market reactions, the only consistent view is that US tariffs will drive the dollar higher, or more accurately, other currencies lower, as the FX market adjusts to compensate for the tariffs. If we look back at Trump’s first term, the first tariffs were imposed on China in early 2018 on solar panels and washing machines and a few other things. A look at the chart below shows that the yuan (the green line) did, in fact, weaken substantially following those tariffs, with the dollar rising from 6.25 to 6.95 over the course of the ensuing six months. However, if we broaden our horizons beyond the renminbi to the dollar writ large, as seen by the Dollar Index (the blue line), which rose from 88 to 96 over the same period, the renminbi’s price action was directly in line with the dollar overall. There was only limited additional impact to CNY. Remember, too, that in 2018, the US equity market was performing quite well, and funds were flowing into the US, thus driving the dollar higher, not dissimilar to what we have seen over the past year. The point is that while the tariffs may have some impact, it is also likely that the dollar will move based on its traditional drivers of interest rate differentials and capital flows regardless.

Source: tradingeconomics.com

Away from the tariff talk, though, there is precious little other market related news, at least on a macro basis. Yesterday’s data showed that GDP grew a tick less than anticipated at 2.3% in Q4, but Real Consumer Spending, which is a critical part of the economic picture, rose at 4.2%, a very solid performance and an indication that things in the economy are still ticking along just fine. (The difference between that number and the GDP number is due to inventory adjustments, which are seen to wash out over time.). In fact, arguably, that solid growth was a key reason that the equity markets in the US had another strong session yesterday, with gains across the board.

Well, there is one other thing on many people’s minds, and that is the veracity of the claims about DeepSeek. You may recall I highlighted the question of all those Nvidia sales to Singapore earlier in the week as somewhat strange. Well, I was not the only one asking that question and this morning in Bloomberg, there is an exclusive story about a US government investigation into whether China actually got the most advanced H100 chips via Singapore after all. If that is the case, then perhaps the DeepSeek claims are not as impressive as they were initially made out. I suspect if this turns out to be the case, that worries over the need for AI to no longer utilize the most advanced chips will dissipate and the tech rally will regain momentum.

So, let’s look at markets now. China and Hong Kong remain closed for their New Year celebrations. Japan (+0.15%) had a modest gain and the truth is that only two Asian bourses had strong sessions, Singapore (+1.45%) and India (+1.0%) with the rest of the region mostly a touch firmer. In Europe, all markets are slightly stronger this morning, on the order of 0.3% or so, as the combination of yesterday’s ECB rate cut and hints at future cuts by Madame Lagarde, seem to be underpinning the markets. Certainly, today’s Eurozone data, showing German Unemployment climbing a tick to 6.2% while Retail Sales there fell -1.6% in December don’t seem like a rationale to buy equities. In the US futures market, though, we are seeing solid performance, 0.5% or more, as I believe many are jumping back on the AI bandwagon.

In the bond market, Treasury yields have edged higher by 1bp, and remain just north of 4.50% as the tension between solid growth and slowing inflation dreams keeps the market quiet. In Europe, though, yields are continuing their decline from yesterday, with sovereign yields down by between -3bps and -4bps as investors look for further easing from the ECB as the Eurozone sinks slowly toward recession. However, in Japan, JGB yields rose 3bps as data overnight showed inflation remains above target and expectations for another rate hike in the first half of the year rise.

In the commodity markets, oil (-0.35%) continues to chop around in the middle of its trading range with no strong directional impulse (see chart below).

Source: tradingeconomics.com

It is very difficult to know how to view this market in the short run given the potential for disruptions by tariffs and even more sanctions, but nothing has changed my long-term view that there is plenty of oil around and prices will remain here or decline. In the metals markets, both gold and silver are little changed on the morning although both have been in the midst of a strong rally with gold making new all-time highs in the cash market yesterday. Copper (-0.7%) is offered this morning but is still much higher than at the beginning of the month/year.

As to the dollar, it is modestly firmer this morning rallying against most of its G10 counterparts, but not by very much, 0.3% (JPY) at most. Versus its EMG counterparts, though, there is more strength with PLN (-0.6%) and ZAR (-0.4%) both under a bit of pressure. The latter is responding to ESKOM, the national electrical utility, announcing that they may need to impose rolling blackouts to help repair parts of the grid.

On the data front, this morning brings Personal Income (exp 0.4%) and Spending (0.5%) but of more importance it brings PCE (0.3%, 2.6% Y/Y) and core PCE (0.2%, 2.8% Y/Y) along with the Chicago PMI (40.0) release at 9:45. We also hear our first post-meeting Fed speaker, Governor Bowman, this morning but it would be shocking if she said anything other than they are going to be patient to watch inflation slowly move toward their target, almost as if by magic.

Once again, tape bombs are the biggest risk, as they will be for the next four years, but I imagine all eyes will be on Trump and the tariffs as the key driver. For now, nothing has dissuaded me from my view the dollar is more likely to rise than fall, but we need to see how things evolve.

Good luck and good weekend

Adf

Cha-Ching

Posted on January 22, 2025 by fxpoet

It wasn’t all that long ago
When data would headline the show
As traders would wait
For each release date
And then recount trades blow-by-blow

But now there is only one thing
That matters, Trump’s latest cha-ching
He speaks off the cuff
Which makes it quite tough
To plan from Berlin to Beijing

As the morning of the third day of President Trump’s second term dawns, it is nigh on impossible to keep up with all the things he is doing and their actual and potential impacts on markets going forward. Arguably, the main FX market driver continues to be the tariff discussion and the question of if, and when, he may be imposing said tariffs. You will recall that on Monday, the mere absence of his reaffirmation that tariffs were coming resulted in a major dollar decline, which was subsequently reversed when he finally mentioned them in the evening.

Of course, those were aimed at Canada and Mexico with China, significantly, left out of the mix. Last night he remedied that situation declaring that China and Europe were also in his sights for tariffs, although he mooted a 10% initial level, far below the 60% he discussed during the election campaign. Once again, I would argue it is not possible at this point to make any serious market prognostications based on the lack of information as to the products to be impacted, the exact timing and what he is seeking in return for a reduction or elimination of those threats.

At the same time, I find the strait-laced approach that ‘tariffs are bad and a tax on Americans which will lead to inflation’ which continues to be promulgated by orthodox academic economists, typically from a left-leaning lens, to be almost comical at this point. We all should remember that during his first term, he imposed many tariffs, especially on China, and yet inflation was quiescent, with CPI averaging 1.9% during the entire term. This is not to say things will be identical in 2024 and beyond, just that in fairness, his record demonstrates that tariffs are not necessarily inflationary. Below is a chart of the monthly readings showing only 8 of the 48 months he was in office that headline CPI rose more than 0.3%, implying the rest of the time it was at or below that level. Those were the days.

Source: tradingeconomics.com

Beyond the tariff discussion, the bulk of his time currently seems to be focused on the size of the government workforce, which is certainly due to shrink, and the border and immigration. What will market impacts of these issues be like? For the former, I would suggest that less government employees will lead to less government interference in the workplace, and arguably, be beneficial for productivity if nothing else. As to the latter, it is a much more difficult problem to solve as there will likely be reductions in both labor supply but also demand for services like housing. It seems quite possible that there will be a reordering of the economy, although it is unclear if that will lead to a net positive or negative from an overall growth perspective, or at least an inflation perspective. Growth, of course, is the product of the size of the workforce * productivity, so a smaller workforce, if that is the outcome, will weigh on topline GDP, but not necessarily on per capita GDP. As I mentioned above, there are far more unknowns than knowns at this time, so forecasting the future is a mug’s game.

As we keep in mind that nobody knows anything about the future, let’s take a look at what happened overnight amid all the knee-jerk reactions to the latest Trump comments.

Yesterday saw US equity markets continue in their winning ways seemingly trying to achieve new highs. In Asia, the follow on was broad with Japan (+1.6%), Korea (+1.2%) and India (+0.75%) all nicely higher although Chinese shares suffered. This should be no surprise now that Trump has squarely put China on the tariff map again, but there are other things happening here as well. Perhaps the most confusing is the word that financial workers would be seeing pay cuts of up to 50% as President Xi no longer sees them as critical workers for the nation. I’m sure this will help rebalance the consumption-production equation…not! So, it should be no real surprise that both mainland (-0.9%) and Hong Kong (-1.6%) shares were under pressure.

Not so the case in Europe where the DAX (+1.2%) is leading the way higher although gains are universal, after comments from several ECB bankers that rate cuts were coming next week and likely will continue during the year. While inflation remains the sole ECB mandate, the weak economic situation plus the threat of tariffs certainly has Madame Lagarde under pressure to do something to support the economy there. Finally, it should be no surprise that US futures are nicely higher this morning with the NASDAQ (+0.9%) leading the way at this hour (7:15).

In the bond market, yields have stabilized after their recent 20bp decline in the past week and have edged higher by 1bp this morning. The same price action has been seen in Europe where sovereign yields are little changed to higher by 2bps across the continent. As to JGB yields, they, too, were unchanged on the session despite an increase in chatter that the BOJ is set to hike rates on Friday.

In the commodity space, gold continues to rally and is now within 1% of its all-time highs set back in late October. This has dragged silver along for the ride, and copper, in truth, although today copper is ceding -0.6%. however, a look at the price movement over the past month shows all three metals nicely higher (Au +5.3%, Ag +3.7%, Cu +6.2%). Oil (0.0%) is flat today as it consolidates its recent retracement. Recall, for the first two weeks of the year, it rallied sharply, up nearly $10/bbl, although it seems that may have been more of a short squeeze than a fundamental shift in thinking. Since then, it has given back about $4/bbl as market participants try to decide if the theorized Trumpian demand increase will offset the supply increase of drill, baby, drill.

Finally, the dollar is little changed this morning overall. That said, net over the past week, it has given back about 1.5% although that was from recent highs. This price movement feels far more like consolidation than a change in view especially given that the tariff story remains front and center. Now, it is possible that the market pushed the dollar higher ahead of the inauguration on a ‘buy the rumor’ idea and is now selling the news, but it remains difficult to see what has changed in the US economy relative to its counterparts that would encourage a change in rate expectations. As to today’s movement, there are more gainers than laggards vs. the dollar, but nothing of any real significance.

On the data front, the only US data is the Leading Indicators (exp 0.0%) so traders will continue to look at corporate earnings and listen to the president for the next pronouncement. I assure you; I have no idea what that will entail. Once again, I am a strong proponent of being hedged because the one thing we have learned lately is that markets can turn on a dime.

Good luck

adf

A Trump Trope

Posted on January 21, 2025 by fxpoet

For one day the markets expected
That tariffs were roundly rejected
But late yesterday
Trump said the delay
Was short with two nations affected

The upshot is all of that hope
That saw the buck slide down a slope
Has largely reversed
As dollar shorts cursed
That tariffs are not a Trump trope

This poet feels vindicated in not trying to anticipate what President Trump is going to do that might impact markets after yesterday’s events. Early in the day there was a story that tariffs would be delayed and were seen as negotiating tools, not punishment. FX traders (mis)read the room and sold the dollar aggressively, with the greenback suffering declines of more than 1% against some currencies, notably MXN. Then, Mr Trump was inaugurated, made a speech, where he promised to make many changes within the operating system of the US, signed a load of Executive Orders and mentioned in a press conference much later in the evening that 25% tariffs on Mexico and Canada would be coming on February 1^st. The chart of USDMXN below shows the price action with the peso having given back the bulk of yesterday’s gains.

Source: tradingeconomics.com

Once again, if we learned nothing from Trump’s first term, it is that anticipation of his moves is a very fraught and dangerous way to manage market risk. Now, will those tariffs actually be implemented? Will they be universal if they are? Or does he anticipate changes from behavior by both nations in the next 10 days? The answer is, nobody knows, probably not even Trump. The upshot is if you have financial market risk, hedging is critical to maintaining acceptable outcomes. And, oh by the way, look for implied volatility of all financial products to rise as market makers also have no idea what is going to happen so will require hedgers to pay up for protection.

In Davos, the world’s glitterati
Are meeting, and though they are haughty
They’re losing their splendor
And edicts they render
Are sinking in value like zloty

While there is a great deal more that President Trump has promised to do immediately, the bulk of it seems likely to only have potential longer-term impacts on financial markets. Meanwhile, in Davos, the World Economic Forum is under way and the main message that I can discern from what I’ve read is that, the members really liked it when everybody listened to what they said and are now really unhappy that President Trump is essentially raining on their parade and devaluing their views and comments. With Trump withdrawing from the Paris Climate Accords and the WHO, key global initiatives are severely hamstrung, which means the WEF is less important. And all their pronouncements regarding the need free trade and global cooperation has far less impact if the US has decided to focus on itself rather than the world at large. My forecast is that by the end of Mr Trump’s term, the WEF will be a sideshow, not a headline event.

And really, at this point, that is pretty much what is happening. Yes, UK Unemployment rose to 4.4% while wages rose 5.6%, but this has simply put the BOE in a tougher spot. The Old Lady has only an inflation mandate, but if Unemployment is rising, they cannot ignore that, and the market is now far more convinced (82% probability) that they will be cutting the base rate by 25bps at their meeting the first week of February. While the pound (-0.8%) is lower this morning, that seems much more about the dollar’s overall strength than this weaker than expected data point as since the release, the pound has fallen only another 0.2%.

So, let’s look around the world and see how markets responded to Trump 2.0. Equity markets in Asia were largely in the green as neither Japan nor China were mentioned on the immediate tariff list, although the late-night proclamation regarding Canada and Mexico implies that this story has not yet been completed. Nonetheless, gains in Japan (+0.3%), Hong Kong (+0.9%) and China (+0.1%) showed the way for most of the region with only India (-1.6%) really suffering during the session on a variety of fears regarding tariffs and interest rates despite no mentions by Trump. In Europe, only Spain’s IBEX (-0.5%) is showing any movement of note and that appears to be specific to some slightly softer than expected corporate earnings results. Surprisingly, Germany and the rest of the continent are little changed, as is the UK. As to US futures, at this hour (7:10) they are pointing higher by about 0.4% in anticipation of more earnings reports today and a generally positive attitude from the new president.

In the bond market, Treasury yields have fallen 5bps overnight, seemingly on the idea that because Trump announced the government would do all it can to reduce prices, and therefore inflation, it would magically work. While I am optimistic things will get better, that is a heavy lift in my opinion and the Fed will need to be far more emphatic on its inflation fighting actions to see this through. In Europe, yields are basically unchanged across the board and similarly, there was no movement in Asia overnight. Once again, the world is looking toward the US for directional cues.

In the commodity markets, oil (-1.3%) is sliding back as Trump’s promise to open up more drilling spaces on federal land as well as his overall encouragement of ‘drill, baby, drill’ has traders concerned that supply is going to come around more quickly than demand. Last January I wrote about my view that there is plenty of oil and it is merely political will that prevents it from being accessed. I have a feeling that is what we are going to begin to see, a change in that political will which means potentially lower prices and increased demand accordingly. In the metals markets, gold (+0.5%) is continuing to climb as we approach month end. There are many in this market who believe the technical picture (see chart below) is pointing to a break to new all-time highs soon. However another, and perhaps more accurate narrative, is that there is an arbitrage between the NY, London and Shanghai exchanges for physical metal and metal is flowing into NY for delivery which begins next Friday. (H/T Alyosha)

Source: tradingeconomics.com

As to the other metals, they are little changed this morning.

Finally, as mentioned at the top, the dollar is much firmer across the board this morning with the peso and NOK (-1.0%) leading the way lower although most currencies seem to be down by at least -0.5%. (Yes, PLN is weaker by -0.6%). This is all dollar-driven with no other idiosyncrasies of note right now. We shall see how this evolves over time.

On the data front, the rest of the week looks like the following:

Wednesday	Leading Indicators	0.0%
Thursday	Initial Claims	218K
	Continuing Claims	1860K
Friday	Flash Manufacturing PMI	49.6
	Flash Services PMI	56.6
	Existing Home Sales	4.16M
	Michigan Sentiment	73.2

Source: tradingeconomics.com

The Fed is in its quiet period so with the lack of data, I suspect that markets will have heightened awareness to every Trump pronouncement with volatility the new normal. Remember, consistency is not his strong suit, at least when it comes to commentary about how he may respond to things.

From the market’s perspective, as long as tariffs are still seen as the likely outcome, look for the dollar to remain well bid while equities will see a mixed performance depending on the nature of the company/industry with importers likely suffering.

Good luck

Adf

Trump 2.0

Posted on January 20, 2025 by fxpoet

Today begins Trump 2.0
And pundits are trying to show
Their ideas are sound
As how he’ll redound
On policies he will bestow

But this poet can’t comprehend
How anyone thinks what they’ve penned
Is likely to be,
To any degree,
Correct. ‘Stead, let’s look at the trend

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Good luck

Adf

In the “Know”

Posted on January 14, 2025 by fxpoet

According to those in the “know”
It’s certain that tariffs will grow
But now some are saying
The timing is straying
From instant to something more slow

In what has been a generally quiet evening in the markets, the story that President-elect Trump is considering imposing all those tariffs on a gradual basis, rather than instantaneously when he is inaugurated, was taken as a bullish sign by investors. This seems to have been the driving force behind yesterday afternoon’s modest rebound in equity markets as the current market narrative is tariffs = bad, no tariffs = good. From what I can determine, these are anonymous comments not directly attributed to Trump or his incoming economics team and, in fact, Trump denied that possibility.

But the market impact was real as not only did equity markets rebound a bit, but the dollar, which had soared yesterday, has given back some of those gains and is modestly lower this morning. If we learned nothing else from President Trump’s first term, it should be clear that there is frequently a great deal of bombast emanating from the White House and responding to each and every comment is a recipe for exhaustion and disaster. While this cannot be ruled out, if one were to ascribe a Trumpian gospel it would be that tariffs are beautiful so slow-rolling them doesn’t really accord with that view. I guess we will all find out more next week.

Now, turning to data releases
This week its inflation showpieces
Today’s PPI
Is tipped to be high
While Wednesday the core rate increases

Away from that story, though, there has been little else of note overnight. As such, let’s focus on the PPI data this morning and CPI tomorrow as they ought to help inform our views on the Fed’s actions going forward. Expectations are for headline to rise to 3.4% Y/Y while core jumps to 3.8% Y/Y. It is difficult to look at a chart of these readings and not conclude that the bottom is in and the trend is higher.

Source: tradingeconomics.com

This is not to say that we are going to see price rises like we did back in 2022 as the waves of Covid spending washed through the economy, but the Fed’s mantra that inflation is going to head back to 2.0% over time is not obvious either. In fact, if I were a betting man, I would estimate that we are likely to continue to see inflation run between 3.5% and 4.5% for the foreseeable future. There is just nothing around to prevent that in the short run. Now, if we do see significant productivity enhancements, those numbers will decline, but my take is the best opportunity for that, more effective and widespread use of AI, is still several years away.

Remember, too, that the government writ large, whether headed by R’s or D’s is all-in on inflation as it is the only opportunity they have to reduce the real value of the outstanding government debt. Perhaps the Trump administration will take a different tack, but it is not clear they will be able to do so. The only time inflation is a concern is when it becomes a political liability. For the two decades leading up to Covid, it was not a daily concern of the population and central banks around the world were terrified of deflation! In fact, there are so many comments by folks like Yellen, Bernanke and other Fed governors and presidents decrying the fact that their key regret was not getting inflation high enough, it is difficult to count them. But as evidenced by the chart below of CPI, we no longer live in that world.

Source: tradingeconomics.com

Summing up, the current situation is that inflation has likely bottomed, the government continues to run massive fiscal deficits and given the $36 trillion in debt outstanding, the government needs to reduce the interest rate they pay on their debt. If pressed, I would expect that we will see synthetic yield curve control (YCC) enabled by regulatory changes requiring banks and insurance companies to own a greater percentage of Treasury notes and bonds in their portfolios to ensure there is sufficient demand for issuance. That can have the effect of turning long-term real yields negative, exactly the outcome the government wants. Remember, from 1944-1951, the Fed enacted YCC directly and it worked wonders in reducing the debt/GDP ratio. They know this tool and will not be afraid to use it.

Ok, let’s take a look at what little action there was overnight. After yesterday’s late rebound resulted in a mixed close with the NASDAQ still lower but the other two indices closing in the green, Asian equity markets also had a mixed picture. The Nikkei (-1.8%) was the laggard, seemingly following last week’s US market movement after reopening from a holiday weekend. However, Chinese shares (Hang Seng +1.8%, CSI 300 +2.6%) rallied sharply on the latest news that more Chinese stimulus was coming soon. This time the Ministry of Commerce claimed they would be looking to boost consumption this year, but neglected to mention how they will do so. Regardless, investors liked the story and when added to the gradual tariff story, it was all green.

European bourses are also in fine fettle this morning with gains across the board (CAC +1.2%, DAX +0.8%, IBEX +0.6%) and even the FTSE 100 (+0.1%) has managed to rally a bit. This price movement, and that of the rest of Asia where gains were seen, seems all to be a piece with the slower tariff story discussed above. As to US futures markets, at this hour (6:40), they are pointing modestly higher, 0.45%.

In the bond market, the only place where yields have moved significantly today is in Japan, where JGB yields have jumped 5bps and are now at their highest point since February 2011. This followed comments from Deputy Governor Himino that the board was likely to debate a rate hike at their meeting next week and market pricing has a 60% probability priced in for the move. There is much talk of wage increases in Japan, and Himino-san also raised questions about what the Trump administration will do and how it will impact yields. Interestingly, despite the more hawkish rhetoric, the yen (-0.25%) actually declined today, not necessarily what you would expect. As to the rest of the bond market, everything is within 1bp of Monday’s closing levels.

In the commodity markets, oil (-0.3%), which has been rocking lately on the increased Russia sanctions, is consolidating this morning although remains higher by nearly 6% this week and 12% in the past month. (As an aside, I don’t understand the Biden theory that sanctions driving up prices is going to be a detriment to Putin as he will make up for the loss of volume with higher prices, but then, I’m not a politician.). Meanwhile, NatGas (-3.2%) has backed off its recent highs as storage concerns ebb, although the ongoing cold weather appears to have the opportunity to push prices higher again. As well, the latest dunkelflaute throughout Europe is driving demand for LNG. In the metals markets, yesterday’s declines have been arrested, and we are basically unchanged this morning.

Finally, the dollar is mixed this morning, edging higher against some G10 counterparts (GBP -0.3%, JPY -0.4%) but sliding against others (NZD +0.6%). Versus the EMG bloc, again the picture is mixed today with gainers (ZAR +0.4%, KRW +0.3%) and laggards (CZK -0.2%) although overall, I would argue the dollar is a touch softer on the back of the gradual tariff story.

On the data front, this morning’s PPI data (exp 0.3% M/M, 3.4% Y/Y) headline and (0.3% M/M, 3.8% Y/Y) core is the extent of what is to come. Interestingly, the NFIB Index jumped to 105.1, the highest print since October 2018, as small businesses are clearly excited about the prospects of a Trump administration and the promised regulatory cuts.

Right now, both the dollar and Treasury yields are pushing to levels that have caused market problems in the past. If these trends continue, be prepared for some more significant price action. That could manifest as a sharp decline in equity markets, or some surprising Fed activity as they try to address any potential market structural problems that may arise. But there is nothing due to stop the trends right now.

Good luck

Adf

No Reprieve

Posted on January 7, 2025 by fxpoet

The scuttlebutt had it correct
Trudeau hit the button, eject
But he’s yet to leave
And there’s no reprieve
His legacy will be neglect

Those reports from yesterday morning were spot on as around 11:00am, PM Trudeau announced that he would, in fact, be stepping down. There is a somewhat convoluted process involved which sees the Canadian Parliament prorogued until late March, while the ruling Liberal party seeks a new leader. At that point, Parliament will be called back into session, and it seems likely a vote of no confidence will be held. Assuming that vote goes against the new leader, an election will be called. No matter how long the Liberals delay this process, and you can bet they will hang on for as long as possible, by October, an election is required. As well, currently all things point to the Conservative party led by Pierre Poilievre winning that election and taking power with a significant majority. Obviously, Poilievre would like the election to happen sooner, rather than later, but it seems hard to believe now, regardless of the new Liberal leader, that the Conservatives will fail to win.

The market impact of this news needs to be separated from the broader drivers, but as I showed yesterday, CAD had been weakening more quickly than the dollar writ large, and now it seems to be moving back into line with the general movement as per the below chart showing the movements between the DXY and USDCAD right on top of each other.

Source: tradingeconomics.com

My sense is that Canada has now had its day in the sun and will soon retreat to the background of most market consciousness going forward. After all, despite it being our largest trading counterparty, it has a small population and small economy with limited impact on the global situation.

Certification’s complete
And Trump, in two weeks, takes his seat
Between now and then
Again and again
Prepare for a surfeit of Tweet(s)

In truth, aside from the Canadian story, the bulk of the discussion in both financial and political circles is focused on exactly what President Trump will do when he is inaugurated on the 20^th. The biggest financial discussion revolves around tariffs and exactly how he plans to utilize them going forward. For the surface thinkers, tariffs are an unadulterated bad policy with significant negative consequences. As well, the idea that tariffs = higher dollar is axiomatic to these people. In fact, yesterday’s reversal in the dollar’s recent substantial gains was based entirely on a story that despite some campaign rhetoric of large tariffs imposed on Day 1 of the new Trump administration, in fact things would be far more nuanced.

While I understand the economic case behind tariffs driving the dollar higher (nations hit with tariffs will devalue their currency sufficiently to offset the tariff and allow their exports to remain competitive in the US), I have always been suspect of that theory and logic. First, we can look at Trump’s first term and see how things played out. The chart below of USDMXN, a tariff target, shows that, in fact, initially the peso strengthened upon Trump’s inauguration and range traded for the bulk of his term, only weakening substantially during the Covid market dislocations.

Source: tradingeconomics.com

We can look at USDCNY as well and see that over Trump’s first term, there were several large ebbs and flows in the yuan but that, in fact, CNY was stronger vs. the dollar at the end of his term than at the beginning. Again, this assumption the dollar will appreciate strongly because of tariffs is a talking point, not an empirical reality.

Source: tradingeconomics.com

The other thing to remember about Trump (although it is not clear how you can forget it) is that he is a businessman, not a politician. He is very transactional and wants to make deals. I am a strong proponent of the idea that Trump sees tariffs as a negotiating tool and while he is a man of great bluster in his public pronouncements, his ultimate goal remains clearly to achieve his sense of fairness in trade relations. If his belief is that a nation is maintaining a weak currency to enhance its mercantilist model, Trump will respond aggressively. Ultimately, I believe a large part of the angst that is evident in governments around the world is that Trump will not behave in a diplomatic manner and will call out all the problems he sees or believes. And other governments are uncomfortable with their own dirty laundry left to air dry. While I continue to believe that inflation remains far stickier than the Fed is willing to admit now, nothing has changed my view that the Fed will not cut again and may be forced to raise rates before the year ends. And that will support the dollar!

Ok, let’s turn to the overnight session. After a mixed Wall Street performance, where the Mag7 continue to shine, but not so much else, we saw the Nikkei (+2.0%) rally sharply as well, following the NASDAQ. Chinese shares (CSI 300 +0.7%, Hang Seng -1.2%) were split with the former benefitting from the reduced tariff story while the Hang Seng suffered largely on the back of Tencent Holdings being named a military contractor by the US DOD with its shares tumbling 8% in the US and HK. Elsewhere in the region, there were both gainers and laggards but nothing of any note in either direction. In Europe, UK shares (-0.3%) are under pressure as 30yr Gilt yields have risen to their highest level since 1998, an indication that investors are becoming concerned over the UK’s future path. For context, current levels are 50bps above those which triggered the October 2022 gilt crisis and spelled the end of PM Liz Truss’s time in office. Meanwhile, continental bourses are modestly higher led by the CAC (+0.6%) which seems to be benefitting from both the lower tariff story as well as hopes that Chinese stimulus will support the luxury goods sector. As to US futures, at this hour (7:05) they are essentially unchanged.

In the bond market, yields are continuing to edge higher everywhere with Treasuries up 1bp and European sovereign yields higher by between 2bps and 4bps across the board. Asian government bond markets continue to sell off as well, with yields there climbing in Japan and Australia and even Chinese 10yr yields edging higher by 1bp. As long as central banks around the world insist that rate cuts are the future (and most of them do) look for bond yields to continue to climb.

In the commodity space, oil (+0.8%) continues to hold its own as trading activity remains modest and hopes are pinned on Chinese stimulus. NatGas (-3.2%) is backing off its highs as the winter storm has passed (although it is still really cold here!) while the metals markets are performing well. Gold (+0.5%) continues to trade either side of $2650/oz as speculators await the next major leg. However, silver (+1.1%) and copper (+0.5%) have both bounced nicely from recent lows as specs look for another breakout higher.

Finally, the dollar is under modest pressure this morning compared to yesterday’s closing levels but is actually slightly firmer than when I wrote yesterday morning. My point is that while it has been selling off from its peak late last week, there is no collapse coming and all eyes will be turning toward the data later this week to see if the Fed will have room to ease further, or if the NFP report will once again show strength and push any further rate cuts off in time. The leading gainer in the G10 is NZD (+0.65%) which is benefitting from a combination of higher commodity prices, hopes for more Chinese stim and the tariff reduction story. But for the rest of the market, 0.2% gains are the norm with only JPY (-0.15%) bucking the trend.

On the data front, this morning brings the Trade Balance (exp -$78.0B) as well as ISM Services (53.3) and JOLTS Job Openings (7.70M). Yesterday’s PMI data while solid was softer than forecast and Factory Orders, too, were a tick lower than expected at -0.4%. First thing this morning we will hear from Richmond Fed president Barkin who has been on the more hawkish side lately. After the weekend chorus that cuts needed to be deliberate, I expect more of the same here.

For now, the broad themes remain unchanged, higher US yields on the back of inflation concerns forcing the Fed to reverse course this year. But on a day-to-day basis, it would not be surprising to see the dollar continue to give back some of its recent gains given the significant size and speed with which they were attained. I still like hedgers picking levels and leaving orders to buy dollars a bit cheaper from here.

Good luck

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The Conundrum We Find

Posted on December 2, 2024 by fxpoet

Tis nearly a month since the vote
When President Trump, Harris, smote
So maybe it’s time
To sample the clime
Of what all his plans now connote

To many, his claims are just talk
With pundits believing he’ll balk
But history shows
That Trump will bulldoze
Detractors as he walks the walk

So, tariffs are likely to be
The first part of his strategy
But if that’s the case
The dollar may chase
Much higher than he’d like to see

It seems the conundrum we find
Is not all his thoughts are aligned
And this, my good friends
Is why dividends
Are paid to a hedge, well designed

I have tried to stay away from forecasting how things will evolve once Mr Trump is inaugurated, but this weekend, listening to a podcast (Palisades Gold Radio) I got inspired as there was some interesting discussion regarding the dollar. As I consider the issues, as well as what appears to be the current expectations, I thought it might be worthwhile to note my views, especially in the context of companies considering their hedging needs for 2025 and 2026.

Clearly, the watchword for Trump is tariffs as he has been boasting about implementing significant tariffs on trade counterparties on day 1. The latest discussion is 25% on Canada and Mexico and 60% on China with Europe in the crosshairs as well. (Remember, though, many believe these tariff threats are being used to encourage those countries to change their emigration policies and help stop the current influx of illegal immigration. So, if countries do their part, those tariffs may never materialize.)

The classical economic view is that tariffs are a terrible policy as impeding free trade negatively impacts all players. As well, you will hear a lot about how the countries in question will not pay them, but rather consumers in the US will pay those tariffs. As such, there is a great deal of talk about how tariffs will feed immediately into inflation. (Of course, this is in addition to the inflation that will allegedly come immediately on the heels of Trump’s promise to deport all illegal aliens in the country because it will decimate the workforce. On this subject, simply remember that the deportation will result in a significant decline in demand for things like housing which remain quite sticky in the pricing process.)

But let’s consider what Trump’ stated goals really are. I would boil them down to rebuilding America’s industrial capacity and creating good jobs throughout the nation for citizens and legal residents. If he is successful, the result will be a dramatic reduction in the trade deficit which will reduce the need to import so much foreign capital to fund things. And what are the knock-on effects there? Well, classical economics tells us that tariffs will be met with foreign currency depreciation (higher dollar) in an effort to offset the higher prices of those imports. However, one of Trump’s goals is to reduce the value of the dollar in order to make US exporters more competitive internationally while reducing demand for imports. Now, it seems that those two goals are at odds.

I think the thing we need to consider, though, is that the timing of these changes is very uncertain. My guess is Trump is thinking of a 4-year process, or at least a 3-year one, not a 6-month outcome. After all, these are tectonic shifts which will take time to play out. Based on his commentary, and I think we must pay it close attention as he is pretty clearly telling us what he wants to do, the market response to any tariffs imposed will likely be weakness in the currencies of the countries affected.

But, over time, it would not be surprising to see Trump lean effectively on the Fed to reduce policy rates (remember, he was quite upset the Fed never went negative). As well, if there is any success in the DOGE project, with significant reductions in spending and deficits, that seems likely to alleviate some of the concerns over the US fiscal stance. After all, if debt grows more slowly than the nominal pace of the economy, it remains quite manageable and should help remove some of the current hysteria. In fact, a look at the 10-year yield over the past month (see chart below) shows that it has fallen 25bps (although they are 4bps higher this morning) and may well be signaling a market that is willing to give DOGE a chance. If that is the case, it seems quite possible that the dollar will eventually start to recede from its current loftier levels.

Source: tradingeconomics.com

Bringing this back to the hedging issue, I might suggest that given the uncertainty of the timing of any movements, receivables hedgers will be well-served by using optionality here, whether outright purchases or zero-premium structures as they look to address 2025 and 2026 exposures. While the dollar may well continue its recent strengthening trend with the euro heading to parity or below for a time, and other currencies following, at some point in H2 25 or beyond, it is quite feasible that the dollar reverses course. Consider what could happen if Trump convenes a Mar-a -Lago accord, similar to the Plaza Accord of 1985, which saw the dollar decline dramatically in the ensuing three years, falling nearly 50% against a broad mix of trading partners’ currencies by the end of 1987.

Source: tradingeconomics.com

In that situation, those out-month hedges will want to have optionality to allow the weaker dollar to benefit the revenue line. Similarly, for those with payables hedges, care must be taken to hedge effectively there as well given the opportunity for much higher costs due to the potential dollar decline. Current market pricing (implied volatilities) is quite reasonable from a long-term perspective. While they are not near the lows seen in the past year, they very likely offer real value for hedgers of either persuasion.

I apologize for the extended opening, but it just seemed to be a good time to review the evolving Trump impact. Now onto markets. The first thing to recall is that last Wednesday’s PCE data continued to show that inflation, even in this measurement, appears to have stopped declining and is beginning to head higher again. This will continue to put pressure on the Fed as housing data was pretty dreadful last Wednesday. Add to the data conundrum the unknown unknowns of a Trump presidency and Chairman Powell will have his hands full until his term ends.

Friday’s abbreviated session in the US saw two of the three major indices trade to new all-time highs (NASDAQ is < 1.0% below its recent high) and that seemed to help support the Asian time zone markets with green outcomes nearly universal. Japan (+0.8%), China (+0.8%) and Hong Kong (+0.65%) all had solid sessions as did every regional exchange other than Indonesia (-0.95%) which has been suffering for the past several months in contrast to most other nations. In Europe, the picture is more mixed with most bourses in the green (DAX +0.8%, IBEX +0.9%) although the CAC (-0.35%) is feeling pain from increased worries that the government there will fall, and the fiscal situation will be a disaster going forward. French yields continue to climb vs. every other European nation as the country is leaderless for now. For the rest of the continent, slightly softer PMI Manufacturing data seems to have investors increasing their bets that the ECB is going to become even more aggressive in their rate cutting going forward. As to the US futures market, at this hour (7:00) it is mixed with the SPX (+0.5%) rising but the other indices little changed.

In the bond market, as mentioned above, US yields have rallied a bit although European yields are all lower by between -2bps and -4bps (France excepted at unchanged) as those hopes for an ECB rate cut are manifest here as well. As to JGB’s, 10yr yields are higher by 2bps this morning as there is increasing chatter that Ueda-san will be hiking rates later this month. One other interesting note here is that in the 30-year space, Chinese yields have fallen below Japanese yields for the first time ever. This seems to be an indication that market expectations of a Chinese rebound (despite solid Caixin PMI data overnight at 51.5) are limited at best.

In the commodity markets, oil is little changed on the day, remaining below the $70/bbl level but potentially seeing some support after a story surfaced that China would be reducing its purchases of Iranian oil in an effort to avoid US sanctions and tariffs under the Trump administration. If Trump is successful in isolating Iran again, that could well support prices. In the metals markets, this morning is seeing a little profit-taking in the precious space after last week’s late rally, but industrial metals are little changed.

Finally, the dollar is stronger again this morning, rallying against all of its counterparts in various degrees. The euro (-0.5%) is lagging along with SEK (-0.65%) in the G10 space as concerns over slowing growth weigh on the single currency. But the dollar is stronger across the board. In the EMG bloc, BRL (-0.75% and back above 6.00) is leading the way lower but we have seen declines across the board with MXN (-0.4%), KRW (-0.7%), ZAR (-0.6%) and HUF (-1.1%) just some of the examples. Despite that hotter than expected PCE data last Wednesday, the market is still pricing a nearly 62% probability of a cut by the Fed later this month.

On the data front, there is much to learn this week, culminating in NFP data on Friday.

Today	ISM Manufacturing	47.5
	ISM Prices Paid	55.2
Tuesday	JOLTS Job Openings	7.48M
Wednesday	ADP Employment	150K
	ISM Services	55.6
	Factory Orders	0.3%
	Fed’s Beige Book
Thursday	Initial Claims	215K
	Continuing Claims	1905K
	Trade Balance	-$75.1B
Friday	Nonfarm Payrolls	195K
	Private Payrolls	200K
	Manufacturing Payrolls	15K
	Unemployment Rate	4.2%
	Average Hourly Earnings	0.3% (3.9% Y/Y)
	Average Weekly Hours	34.3
	Participation Rate	62.6%
	Michigan Sentiment	73.3

Source: tradingeconomics.com

In addition to all the data, we hear from 10 different Fed speakers, most notably Chairman Powell on Wednesday afternoon. Given that the recent data does not seem to be going according to their plans, at least not the inflation data, it will be very interesting to hear what Powell has to say about things.

As the end of the year approaches with many changes certain to come alongside the Trump inauguration, I will once again express my view that hedging is crucial for risk managers here. While I see the dollar benefitting in the near term, as discussed above, the longer-term situation is far less certain.

Good luck

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fxpoetry

Explaining the rhyme and rhythm of the FX markets each day

Tag Archives: #tariffs

Loathing and Fear

Rate Cuts Have Slowed

Run Amok

Forked Tongue

Cha-Ching

A Trump Trope

Trump 2.0

In the “Know”

No Reprieve

The Conundrum We Find