Tag Archives: #trade

A Scold

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The market’s convinced that Chair Jay
Is going far out of his way
To keep rates on hold
‘Cause Trump’s been a scold
And strength’s what Jay wants to portray
 
But ask yourself why should rates fall?
With stocks at new highs, after all
And crypto’s exploded
Which clearly eroded
The storied liquidity fall

 

Yesterday’s market activity was benign with modest market movements in both equity and bond markets although the dollar did rally sharply, on the back of the EU trade deal.  Of course, economic theory predicts just that, when tariffs on a nation (or bloc of nations) are raised, that currency will decline in value to offset the tariffs.  Recall, this was the expectation in the beginning of 2025 when President Trump was just coming into office and calling himself ‘Tariff Man’ as he explained he would be imposing tariffs on virtually all US trading partners.  However, back then, the theory didn’t work out very well and the dollar declined throughout the first six months of the year as can be seen below.

Source: tradingeconomics.com

In fact, analysts quickly moved on and were virtually gleeful that the dollar’s decline of roughly 13% was the largest decline during the first six months of the year since the 1980’s.  Personally, I’m not sure why classifying the decline in terms of the time of year is relevant, but that was a key talking point in the narrative that described the end of American exceptionalism.  Other parts of that narrative were the end of the dollar as the global reserve currency (gold was going to take over) and the onset of other currencies as payment rails for trade.  

None of that ever made sense nor do current proclamations that the euro’s status has changed in any significant way.  There are still very significant long euro positions outstanding as the dollar decline theory has many adherents, but being long euros, aside from being expensive, just got a bit uglier after yesterday’s and this morning’s declines totaling about -1.5%.  

Remember, a key portion of the short dollar thesis is that the Fed is going to cut rates more than other central banks going forward.  And now that the FOMC’s meeting is starting this morning, let’s discuss that idea.  We all know that President Trump has been a vocal advocate for significant rate cuts immediately.  However, let’s look at some evidence.  On the one hand, equity markets are at historic highs in terms of prices as well as readings like the Buffett ratio (market cap/GDP) and P/E and P/S ratios as well.  Crypto currencies, arguably the most speculative of assets, have been flying, especially things like meme coins, which are literally a play on the greater fool paying someone more than they paid for a token with no intrinsic value whatsoever.  Credit spreads, especially for weak credits, are pushing historic lows as per the below chart.  All these things point to not merely ample liquidity and policy being appropriate, but excess liquidity and policy being easy.  

And yet the other side of that coin is a look at 2-year Treasury yields, which have a long history of accurately forecasting future Fed Funds levels.  Right now, as you can see in the below chart, they are trading at a 50 basis point discount to Fed Funds, an indication that the market is quite convinced the Fed is going to cut rates.  Ironically, I believe that Chairman Powell, a PE guy by background, is a strong believer in lower interest rates and I’m sure all his colleagues from his time at Carlyle Group are also pressing for lower interest rates, but he doesn’t want to seem cowed by Trump.

The market is pricing just a 3% probability of a cut tomorrow, but a 65% probability of a cut in September and then another cut in December.  It strikes me that we will need to see a major reversal in the economic situation in the US, with Unemployment rising and growth rapidly declining in order to bring about a situation where there is a real case to be made for a cut.  But we also know that politics plays an enormous role in this story, and while expectations are that we are going to see two dissents at tomorrow’s meeting, that will not change the outcome of no movement.

Adding this all up I conclude that the weak dollar thesis is largely predicated on the idea that the Fed is going to ease monetary policy going forward, catching down to what most other central banks have already done.  And I agree, if the Fed does cut rates, the dollar will fall.  But every day I watch market behavior and continue to see economic data that appears to be holding up pretty well despite a great deal of angst from the analyst community, and I find it harder and harder to come up with a reason to cut rates.  

Consider the story about the new effort by the Trump administration to remove 100,000 regulations by July 4th2026.  Estimates of the value that will unlock are upwards of $1.5 trillion and that assumes no policy changes.  That’s more than 5% of GDP.  I cannot help but believe that President Trump is going to be successful in completely changing the way the US economy works by changing the way (i.e. reducing) the government’s intrusions in the economy.  And if that is successful, it is not clear why interest rates need to decline.  Remember, too, there is an enormous amount of data compressed into this week, so by Friday afternoon, we will have much more information.

Ok, a quick turn round markets shows that after a mixed session in the US yesterday, Japan (-0.8%) slipped on concerns over the nature of the trade deal, while China (+0.4%) edged higher as trade talks continue in Stockholm between the US and China.  Elsewhere in the region both Korea and India rose a bit, spurred by hopes for trade deals there, and the rest of the area was mixed with no large movement.  In Europe, green is today’s color as investors have taken the avoidance of a trade war as a positive and added the euro’s weakness as a positive as well, helping European exporters.  So, gains are strong (DAX 1.3%, CAC 1.4%, FTSE 100 0.7%) and things are generally bright despite grumbling by some nations that the trade deal is going to hurt them.  And at this hour (7:30), US futures are higher by 0.3% or so.

In the bond market, yields are edging lower this morning (Treasuries -2bps, Gilts -1bp, Bunds unchanged) as investors remain either comfortable with the current situation or uncertain what to do to change things at current yields.  I vote for uncertainty.

In the commodity markets, neither oil nor metals markets are moving much at all this morning with daily fluctuations less than 0.2% in all of them.  This has all the feel of a consolidation ahead of tomorrow’s Fed and the rest of the week’s data including GDP, PCE and NFP.

Finally, the dollar is firmer again today vs. almost all its counterparts with gains on the order of 0.2% to 0.3% in most G10 and EMG currencies.  However, two CE4 currencies (PLN -0.6% and HUF -0.9%) are under pressure with the former complaining that the trade deal will cost them > €2 billion, while the latter is suffering from poor economic data heading into an election where President Orban is on shakier ground that normal.  But net, expect to hear about some more dollar strength in the wake of higher tariffs.

On the data front this morning, we see the Goods Trade Balance (exp -$98.4B), Case Shiller Home Prices (3.0%), JOLTS Job Openings (7.55M) and Consumer Confidence (95.8).  With so much focus on trade lately, I suspect that number could matter, but really the JOLTS number will be of more interest, especially for the bond market, as any weakness in the labor market will encourage the lower rates story.

And that’s really all for today.  Until we hear from Powell, it is hard to make a dollar call in the short-term, and the medium term is dependent on the Fed’s actions.

Good luck

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Europe Has Folded

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Last week Japan finally agreed
To tariffs as they did concede
Now Europe has folded
Their cards as Trump molded
A deal despite pundits’ long screed
 
So, now this week there’s lots of news
That ought to give markets more cues
Four central banks speak
And late in the week
Inflation and jobs we’ll peruse

 

All the talk this morning revolves around the announcement yesterday of a US-EU trade deal where the basics are a 15% tariff on all EU exports to the US and an EU promise to buy US energy and defense products totaling some $550 billion.  Many have said that the agreement means nothing because for it to become law, it requires both the European parliament and each nation to vote to agree on the deal.  As well, we are hearing from various nations how it is a terrible deal (French farmers are furious, German pharmaceutical manufacturers are furious and unions all over the continent are unhappy) and certain politicians (notably Marine Le Pen) are also extremely unhappy.  

It is far too early to understand if the deal will be implemented in full, but the precedent has been set that European exports to the US are going to be subject to higher tariffs than any time since prior to WWI and that is true whether the deal is ratified or not.  As analyst/trader Andreas Steno Larsen explained well this morning, “The EU vs. US trade deal highlights that the EU primarily exports ‘nice-to-have’ products rather than essential ‘need-to-have’ ones.  And if you think about it, arguably the best-known EU companies are luxury goods makers, whether in fashion or autos.  So, while there are women who swear they ‘need’ that Birkin bag, the reality is far different.  

Expect to hear a lot more about this deal going forward, but the market response has been quite positive with European equity markets (IBEX +1.0%, FTSE MIB +0.9%, CAC +0.6%, DAX +0.4%) all higher along with US futures (+0.3%).  Interestingly, Asian markets were mixed overnight as Japanese (-1.1%) and Indian (-0.7%) equities suffered, perhaps on the idea that their deals were no longer that special.  China (+0.2%) and Hong Kong (+0.7%), though, did well amid news that another meeting was scheduled between the US and China, this time in Stockholm, to continue the trade dialog.

Away from the trade discussion, market focus this week is going to be on a significant amount of news and data to be released as follows:

TuesdayTrade Balance-$98.4B
 Case Shiller Home Prices3.0%
 JOLTS Job Openings7.55M
 Consumer Confidence95.8
WednesdayADP Employment78K
 Q2 GDP2.4%
 Treasury QRA 
 BOC Interest Rate Decision2.75% (unchanged)
 FOMC Interest Rate Decision4.50% (unchanged)
 Brazil Interest Rate Decision15.0% (unchanged)
ThursdayBOJ Interest Rate Decision0.50% (unchanged)
 Initial Claims224K
 Continuing Claims19660K
 Personal Income0.2%
 Personal Spending0.4%
 PCE0.3% (2.5% Y/Y)
 Core PCE0.3% (2.7% Y/Y)
 Chicago PMI42.0
FridayNonfarm Payrolls102K
 Private Payrolls86K
 Manufacturing Payrolls0K
 Unemployment Rate4.2%
 Average Hourly Earnings0.3% (3.6% Y/Y)
 Average Weekly Hours34.2
 Participation Rate62.3%
 ISM Manufacturing49.6
 ISM Prices Paid66.5
 Michigan Sentiment61.8

Source: tradingeconomics.com

In addition to all of this, there are Eurozone GDP and inflation data, Japanese inflation data and PMI data from all around the world.  Happily, there is virtually no central bank speaking beyond the post meeting press conferences as I presume all of them will be seeking an escape.

There is far too much data to discuss in any depth this morning, but my take is that President Trump has managed to move the Overton Window significantly over the course of his first 6 months in office.  If you recall, it was on “Liberation Day” back in April, when he announced his reciprocal tariffs on the rest of the world, that the global economic community had a collective meltdown and proclaimed the end of the economy as we know it.  Equity markets around the world plummeted and the future seemed bleak, at least according to every economist and pundit who could get their views heard.  Now, here we are a bit more than three months later and tariffs of 15% on the entire EU as well as Japan, 10% on the UK and higher on other nations is seen as a solid outcome, sidestepping the worst cases promulgated, and the world is moving on.

It appears, at least for the moment, that Mr Trump understood that most nations need to export to the US more than the US needs to export to them. I would contend that is why these deals, which in many eyes seem unfavorable to the US counterparts, are being agreed.  It is far too early to ascertain if things will work out as Trump expects, as the naysayers expect or somewhere in between (or entirely different) but thus far, you have to admit that the president has largely gotten his way.

So, as we open the week, we have already seen equity markets are generally in a positive mood.  Bond markets are also behaving well, with Treasury yields edging higher by 1bp, still glued to that 4.40% level, while European sovereign yields have mostly slipped -2bps or so on the session.  And last night, JGB yields fell -4bps.  It appears that bond investors are not as concerned about the trade deals as some would have you believe.

In fact, the market with the biggest reaction overnight has been FX, where the dollar is showing strength against virtually all its counterparts in both G10 and EMG spaces.  EUR (-0.8%) is the G10 laggard, although CHF (-0.8%) is right there with the single currency as clearly, Switzerland will be impacted by the EU tariff deal.  But AUD (-0.6%), JPY (-0.5%) and SEK (-0.65%) are all under pressure as well as the DXY (+0.6%) continues its bounce.

Source: tradingeconomics.com

I continue to read about all the reasons why the dollar is losing its luster in the global community, because of tariffs, because of the Treasury’s actions freezing Russian assets after the invasion of Ukraine, because China and the BRICS are seeking other payment means to eliminate the dollar from their economies, because American exceptionalism is dead, and yet, while I am no market technician, I cannot help but look at the chart of the DXY above and see a broken downward trendline, indicating a move higher, and a bottoming in the moving average, also indicating further potential gains.  I am confident that if the FOMC cuts rates (which full disclosure I don’t believe makes sense given the current amount of available liquidity and global equity market performance) that the dollar will decline further.  But all those traders who are short dollars (and it is a very crowded position) are paying away between 25bps (long GBP) and 450bps (long CHF) on an annual basis so need to see the dollar’s previous downtrend resume pretty quickly. (see current overnight rates across major economies below from tradingeconomics.com)

The market is pricing just a 2% probability of a rate cut on Wednesday, and about 60% of a September cut. Unless this week’s data screams recession, I am having a hard time seeing the case for the dollar to fall much further, at least in the short and medium term.  And this includes the fact that it is pretty clear President Trump would like to see a lower dollar to help US export competitiveness.

Finally, a look at commodities shows that while oil (+1.3%) is having a solid session, it remains in the middle of its trading range for the past several weeks.  Meanwhile, metals prices (Au -0.1%, Ag -0.2%, Cu -0.4%) are feeling a little strain from the dollar’s strength but generally holding up well overall.  Too, while there has historically been a strong negative correlation between the dollar and metals, given the large short dollar positions that are outstanding, it would not be hard to see both cohorts rally in sync for a while going forward.

And that’s really all for today.  The data doesn’t really start until tomorrow, and as its summer, trading desks are already lightly staffed.  Look for a quiet session today and the potential for choppiness this week if the data is away from expectations.

Good luck

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Why Their Economy’s Poo

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With Tokyo having conceded
On trade, focus turns to what’s needed
For Europe to sign
A deal to align
Its interests and trade unimpeded
 
But headlines about the EU
Explain they have made a breakthrough
With China on carbon
Which might be a harbin-
Ger of why their economy’s poo

 

Yesterday’s market activity was focused on the benefits of the fact that the US and Japan had reached a trade deal, whatever the terms, and that it seemed to set the stage for other deals to come.  Naturally, all eyes turned to the EU, where negotiations are ongoing, and the working assumption is that they, too, will wind up with a 15% tariff on all goods exported to the US, like the Japanese deal, and that non-tariff barriers would be removed reduced as well.  My sense is that is a reasonable assumption as it will clarify the process going forward and allow businesses to plan and invest accordingly.

As an aside, I am curious why there is so much angst over tariffs from the economist’s community.  Generically, most economists will explain that consumption taxes are better than income taxes as they are more efficient, and fairer in many ways.  After all, if something has a high tariff, you can avoid paying it by not buying the item (I know that’s simplistic but work with me here).  However, an income tax is unavoidable if you earn income.  In fact, that is why so many economists love the VAT.  Yet when it comes to President Trump’s tariff plans, combined with the fact that the OBBB prevented a major tax hike and cut rates for certain parts of income like tips and overtime, these same economists are up in arms over the process.  I would have thought that is exactly what most economists would want to see.  But then, I am just a poet.

Ok, back to the EU, where while the trade deadline with the US is fast approaching, EU Commission president Von der Leyen was in China where she agreed with President Xi to lead the way on CO2 reduction.  Apparently, it was the only thing on which they could agree, and it is, quite frankly, hilarious.  Whatever your views on CO2’s impact on global warming, and if there even is global warming, China is by far the largest emitter of the stuff on the planet.  As of 2023 (which apparently is the most recent data available) here is a list of the top ten countries regarding emissions.

Obviously, only one EU nation is on the list, but if you sum up the entire EU, it comes in at about 2.9 million tons.  (GtCO2e = gigatons of CO2 emitted).  Meanwhile, China continues to build out its electricity infrastructure by expanding its fleet of coal-fired generation, adding 94.5 gigawatts last year.  My point is that if you wonder why Europe’s economy has lagged the US so badly for so many years, this is a perfect encapsulation of the problem.  They are highly focused on virtue signaling for something over which they have essentially no control, and the one nation that could impact things, literally doesn’t care.  For their sake, I hope they agree trade terms.

But away from that, and all the news that DNI Tulsi Gabbard is making with document declassifications and releases, markets continue to trade as though all is well.  It is noteworthy that recent concerns over US Treasury issuance and how foreign investors would be shunning the US because of its uncontrollable debt situation have not been heard in several weeks now that Treasury auctions seem to be going along fine with plenty of foreign buyers attending and buying.  Maybe the worst case is not the default case here.

Ok, so let’s see how markets are digesting the most recent news.  More record highs in the US stock market were followed by gains throughout much of Asia last night with Japan (+1.6%) continuing to benefit from the trade deal and both China (+0.7%) and Hong Kong (+0.5%) feeling some love as talk is a deal there is also getting closer.  Elsewhere in the region, there were a mix of gainers (Singapore, Korea, Malaysia) and laggards (India, Australia, Thailand) but a little bit more positivity than negativity.  In Europe, only France (-0.25%) is lagging today with the rest of the continent (DAX +0.4%, IBEX +1.7%) generally in good shape as investors await the ECB decision, although no policy change is expected.  The UK (+0.9%) is also having a solid day despite lackluster data which seems to be all about the potential US EU trade deal.  As to US futures, at this hour (7:25) they are mixed with the DJIA (-0.4%) lagging while the other two key indices are higher by about 0.25%.

In the bond market, yields are ticking higher across the board with Treasuries (+2bps) back at 4.40%, although still below the top if its recent trading range.  In fact, I think the below chart does an excellent job of describing the fact that the bond market, despite much angst, has done nothing and is trending nowhere for the past six months.

Source: tradingeconomics.com

As to European sovereigns, yields there are higher by 4bps across the board.  The story I read tells me this is optimism that a US-EU deal will help juice the EU economy, thus driving yields higher.  I’m skeptical.

In the commodity markets, oil (+0.8%) is bouncing off its lows, allegedly also responding to the positive trade news.  I guess.  Precious metals, though, are lower (Au -0.7%, Ag -0.5%, Pt -1.25%) as either there is less fear about the future or somebody sold a lot of metals after their recent rally.  Copper (+1.0%) though, continues to benefit from the trade story as well as the underlying story regarding insufficient supply for the future electrification of the world.

Finally, the dollar is a bit firmer this morning, rising 0.2% against both the euro and pound with the yen (-0.15%) also moving in that direction.  Surprisingly, CHF (-0.3%) is the biggest mover in the G10 while ZAR (-0.4%) is the EMG laggard as it follows (leads?) precious metals lower.  This trend remains downward, although as discussed yesterday, it is possible we have seen a true break of that trend.  If Trump successfully concludes the main trade deals, I imagine that we will see significant inflows to the US and that should support the greenback.

On the data front, after the ECB announcement at 8:15, we see Initial (exp 227K) and Continuing (1960K) Claims as well as the Chicago Fed National Activity Index (-0.1) which had a terrible showing last month.  Later we get flash PMI data (Manufacturing 52.6, Services 53.0) and then New Home Sales (650K) at 10:00.

Right now, the market feels like it is embracing the potential for more trade deals to remove uncertainty.  Earnings numbers have been generally strong in the US, which continues to support the stock market, but it remains to be seen how much of the tariffs will be absorbed by corporate margins and how much will find its way into prices.  If the former, that implies earnings will start to lag.  Meanwhile, given the market is generally short dollars, and it appears the next piece of news is more likely to be dollar positive than negative, I have a feeling we could see the dollar bounce nicely in the next weeks.

Good luck

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All Its Sophists

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

 

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

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

Source: tradingeconomics.com

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

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

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

                                                                                     Today        1 Week        1 Month          YTD

Source: tradingeconomics.com

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

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

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

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

Source: tradingeconomics.com

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

Good luck

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Flat On His Face

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Poor Ishiba-san
Started with so much promise
Fell flat on his face

 

In what cannot be a major surprise in the current political zeitgeist, a fringe party that focused all its attention on inflation and immigration (where have we heard that before?) called Sanseito, captured 12 seats, enough to prevent Ishiba-san’s coalition of the LDP and Komeito from maintaining control of the Upper House of Parliament there.  The electoral loss has increased pressure on PM Ishiba with many questioning his ability to maintain his status for any extended length of time.  While he is adamant that he is going to continue in the role, and that he is fighting the good fight for Japan with respect to trade talks with the US, it appears that the population has been far more focused on the cost of living, which continues to rise, and the increase in foreign visitors in the nation.  Sanseito describe themselves as a “Japan First” party.

Consider, for a moment, the cost of living in Japan.  For the 30 years up until 2022, as you can see from the chart below taken from FRED data, the average annual CPI was 0.44%.  

In fact, the imperative for Japanese monetary policy was to end the decades of deflation as it was deemed a tremendous drag on the economy.  This was the genesis of their Negative Interest rate policy as well as their massive QE program, which went far beyond JGBs into equities and ETFs.  Now, while the economists and politicians hated deflation, it wasn’t such a bad thing for the folks who lived there.  Think of your life if prices for stuff that you consume rose less than 1% a year for 20-30 years.  

But now, under the guise of, be careful what you wish for, you just may get it, the Japanese government has been successful in raising the nation’s inflation rate to their 2.0% target and beyond and have shown no ability to halt the process.  After all, the Japanese overnight rate remains at 0.50% leaving real rates significantly negative, which is no way to fight inflation.   So, while Ishiba-san explained to the electorate that he was defending Japan’s pride and industry, the voters said, we want prices to stop rising.  

The biggest problem for Japan is that they now have less than 2 weeks to conclude a trade deal with the US based on the latest timeline, and their government is weak with no mandate on trade.  It is not impossible that Japan caves on most issues because if they fight, given the government’s current status, it could be a lot worse.

Now, Friday, when I discussed this possibility, I made that case that if the LDP lost the Upper House majority, it would be a distinct negative for both the yen and the JGB market.  Well, as you can see in the chart below, the first call has thus far been wrong with the USDJPY falling a full yen right away, and after an initial bounce, it has resumed that downtrend.  Like the dollar’s strength when the GFC exploded in 2008, despite the fact that the US was the epicenter of the problem, it appears that Japanese investors are bringing more money home as concern over the future increases.  Over time, I expect that the yen is likely to weaken, but I guess not yet.

Source: tradingeconomics.com

As to JGBs, Japan was on holiday last night, celebrating Sea Day, so there was no market in Tokyo.  While there is a JGB futures market, there was very little activity, and we will need to wait until this evening to learn their fate. 

The deadline for trade talks is looming
And Europe, responses, are grooming
If talks fall apart
And cut to the heart
Of what people there are consuming

The other story that is getting discussed this morning is the fast-approaching trade talk deadline of August 1st.  The EU has been actively negotiating to achieve a deal and there appears to be a decent chance that something will be concluded.  However, this morning’s stories are all about how Europe is preparing a dramatic response (“if they want war, they’ll get war” according to German Chancellor Merz) if they cannot reach a deal and the US imposes much higher tariffs on EU exports.  It is actually quite amusing to see the framing of Europe as the righteous entity being unfairly treated and forced to create a response to the American bullies.  But, that is the message from the WSJ and Bloomberg, and I’m sure from the other news sources that I don’t follow.

Every time I consider the trade situation, and the speed with which President Trump is working to conclude deals, I am amazed at how quickly this is all coming about.  Consider that the Doha Development Round of trade talks was launched in 2001 and IS STILL ONGOING with no resolution yet.  The previous framework, the Uruguay Round took 8 years to complete.  Thus, perhaps the question should be, why have trade talks taken so long in the past.  Much has been made of how President Trump blinked when the original 90-day window closed and so extended the timeline for a few weeks.  Apparently, the use of more sticks and fewer carrots is what has been needed to get these things moving along.  Otherwise, trade negotiators had cushy jobs with no accountability and no responsibility, so no incentive to come to an agreement.

Many analysts have explained that the US will suffer from these deals as inflation will rise because of tariffs and growth will slow.  Of course, these were the same analysts who explained that tariffs by the US would result in other nations’ currencies weakening to offset the tariff.  Once again, I would highlight that old analyst models are not fit for purpose in the current world situation.  I have no idea if there will be a successful conclusion of these deals, but I won’t bet against that outcome.  In the end, as I have repeatedly explained, the US has been the consumer of last resort for nations around the world, and loss of access to the US market is a major problem for everybody else.  That is a very large incentive to agree to deals.

Ok, enough, let’s see how things look this morning.  Tokyo was closed last night but we saw gains in Hong Kong (+0.7%) and China (+0.7%) as the PBOC maintained its policy ease supporting the economy.  In fact, Chinese money supply has been growing recently which should help the economy there, although it is still struggling a bit.  The rest of the region was a mixed bag with some gainers (Korea, India, Indonesia) and some laggards (Taiwan, Australia, Malaysia).  In Europe this morning, equities are under some pressure with the CAC (-0.5%) the laggard, although all bourses are lower.  This appears to be trade related with some concerns things won’t work out.  As to US futures, at this hour (7:05), they are pointing higher by about 0.25%.

In the bond market, yields are falling everywhere with Treasuries (-4bps) lagging the continent where European sovereigns have all seen 10-year yields decline by -6bps to -7bps.  It seems that there is growing hope the ECB will cut rates this Thursday, although according to the ECB’s own Watch Tool, the probability is just 2.7% of that happening.  

In the commodity space, oil is unchanged this morning as the variety of stories around leave no clear directional driver.  However, remember, it has bounced off recent lows despite production increases, and if confidence in economic growth is returning, which it seems to be, then I suspect the demand story will improve.  Meanwhile, metals markets (Au +0.65%, Ag +0.89%, Cu +1.1%, Pt +1.2%) are all having a good morning as a combination of dollar weakness and better economic sentiment are supporting the space.

As to the dollar, it is broadly lower against all its major counterparties apart from NOK (-0.2%) and INR (-0.2%) as NY walks in the door.  While the yen has been the biggest mover, the rest of the world has seen gains on the order of 0.35% or so uniformly.  The INR story apparently revolves around the trade talks with the US and concerns they may not be completed on time, but looking at the krone, after a strong rally last week following oil’s recovery, this morning looks like a bit of profit-taking there.

On the data front, there is very little coming out this week amid the summer holidays.

TodayLeading Indicators-0.2%
WednesdayExisting Home Sales4.01M
ThursdayECB Rate Decision2.00% (no change)
 Initial Claims228K
 Continuing Claims1952K
 Flash PMI Manufacturing52.5
 Flash PMI Services53.0
 New Home Sales650K
FridayDurable Goods-10.5%
 -ex Transport0.1%

Source: tradingeconomics.com

In addition to this limited calendar, it appears the FOMC is on vacation with only two speakers, Chairman Powell tomorrow morning and Governor Bowman tomorrow afternoon.  It is hard to get too excited about much in the way of market movement today.  As has been the case for the past six months, we are all awaiting the next White House Bingo call, as that is what is driving things for now.

Good luck

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Very Near Future

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The “very near future” is when
The US and China, again
Will restart their talks
Assuming no balks
By either of these august men
 
That’s all that the market required
For buyers to get so inspired
Can this idea last?
Or will it have passed
Ere market resolve has expired

 

While all and sundry have been very confident that President Trump’s attempt to alter the structure of the global economy and world trade to a more beneficial one, in his view for the US, will fail dismally and that we are doomed to stagflation as prices rise and the economy sinks, it seems these same economic analysts have forgotten that there are two sides to the supply/demand equation.  I have written before that despite all the slings and arrows that have been aimed at Trump, the US has a very strong hand in the trade game given it is THE CONSUMER OF LAST RESORT.  Virtually every nation in the world has built an economy designed to be able to manufacture stuff cheaply and sell it into the largest economy in the world.

And US consumers are remarkable in their ability to continue to consume at high levels despite what appear to be significant headwinds, whether high financing costs, limited savings or slowing economic activity.  But a funny thing is happening on the way to this mooted US stagflation, it’s not happening yet.  In fact, as described by economist Daniel Lacalle in his most recent post, it seems that the biggest problem is not that Americans cannot find what they want to buy, it is that they only bought all this stuff because it was cheap.  They will not accept significant price rises and so inventory is building up at factories while ships are stuck with containers full of stuff nobody wants, at the price.  Could it be that President Trump read the room better than the economists?

I use this as preamble to yesterday’s massive equity rebound which was, ostensibly, triggered by comments from Treasury Secretary Bessent that substantive trade talks with China would begin in the “very near future.”  Subsequent soothing comments by the President indicated that the days of 125% tariffs were numbered but there would be tariffs in place.  As well, Mr Trump explicitly said he has no intention to fire Fed Chair Powell, despite his recent diatribe that Powell is always late to the party and should cut rates.  Certainly, I agree the Fed is, and will always be, late to the party as long as they use a data driven approach.  After all, by the time economic change is reflected in the data, whatever is going to change has already done so.  However, I don’t yet see the rationale for cutting rates given the current economic data and the fact that inflation remains a problem.

As of this morning, following significant equity rallies around the world, one might come to believe that all the world’s problems have been successfully addressed.  The fact that one would be wrong in that belief is the best example of ‘the market is not the economy’.  But, hey, let’s take the rallies when they come!

From a market perspective, that was really the big story yesterday and continuing into today.  Flash PMI data is not that exciting, and all the other headlines revolve around the ongoing immigration/deportation issues plus RFK Jr’s edict to remove petroleum-based food coloring from foods.  So, let’s look at the markets and recap the action.

The 2.5% to 3.0% gains in the US were followed by Tokyo (+1.9%) and Hong Kong (+2.4%) performing well but nothing like Taiwan (+4.5%).  The laggard last night was China (+0.1%) with other regional exchanges showing gains between 0.5% and 1.5%.  Net, I suppose everybody was happy.  In Europe this morning, the screens are green as well, with Germany (+2.6%) leading the way followed by France (+2.2%) and the UK (+1.3%).  Again, the trade story appears to be the leading driver.  And, adding to the joy, US futures are also higher between 2.0% (DJIA) and 3.0% (NASDAQ) this morning as of 6:50.  And to think, just two days ago I was assured that the end was nigh.  A quick look at the S&P 500 chart below does give a flavor for just how much volatility we have seen on a day-to-day basis and how narrative changes continue to have huge impacts.

Source: tradingecomics.com

At the same time, Treasury yields have been retracing, lower by -8bps this morning with UK gilts (-6bps) also performing well, although continental European sovereigns are not seeing the same demand with bunds (+3bps) the laggard despite the weakest PMI readings with both Manufacturing and Services below 50.0, lower than last month and far lower than forecasts.  The narrative of money leaving the US and heading back to Europe is certainly appealing, and seems quite reasonable as a long-term metric, but it is not clear to me that it will be driving daily price action in any market.

In commodities, oil (+1.0%) continues to edge higher although it has not yet come close to filling that massive gap lower from the beginning of the month.  

Source: tradingeconomics.com

From a fundamental perspective, fears of a US recession, which remain high, as well as the IMF recently reducing their global growth forecast seem to be undermining the demand side of the equation.  Meanwhile, the opportunity for significant new supply (Iran deal, Russia peace) seems quite real.  I’m no oil trader but it strikes me the risk-reward here is for a further drop in prices.  As to the metals markets, gold (-0.4%) fell more than $100/oz yesterday, so perhaps my view that the parabolic move was too much was correct.  However, I believe this is a short-term, and much needed, correction with the long-term story fully intact.  Meanwhile, silver (+1.4%) and copper (+0.4%) are modestly higher after quiet sessions yesterday.

Finally, the dollar is firmer this morning against most of its counterparts, but this is not a universal situation.  While both the euro and pound have fallen -0.25%, AUD (+0.6%) is showing some oomph as it figures to be one of the key beneficiaries of a trade agreement between the US and China, no matter how far in the future.  Other key gainers are KRW (+0.6%) and CNY (+0.3%), with both clearly benefitting from that same trade story.  But otherwise, the dollar is mostly ascendent.  

An aside here on the yen (-0.4%) which just two days ago traded below the key psychological level of 140 and this morning is back above 142.  It strikes me that this is the first currency that will be reactive to any trade deal.  As you can see from the below, long-term chart of the yen, it has spent the bulk of its time at far higher (dollar lower) levels.  I suspect that any trade deal will include an effort to revalue the yen higher vs. the dollar, perhaps to its longer-term average of around 120.

Moving on to today’s data, we have New Home Sales (exp 680K) and then the Fed’s Beige Book at 2:00pm. I’m not sure when the surveys were taken for the Beige Book, but you can be sure they will express a great deal of uncertainty and discuss how it will reduce economic activity.  You can also be sure that this will be hyped in the press.  But now that everything is better (just look at the stock market) is this old news?

If we try to look past the daily gyrations to the bigger picture, I would contend the following is the case.  Equity markets remain overvalued and are likely to weaken, the dollar is likely to slide as well as foreign investors slowly reallocate funds away from the US.  Quite frankly, the Treasury story is much harder as the interplay between inflation and potential reduced government expenditure is highly uncertain right now, although one will eventually dominate.  Finally, commodities remain far more important than their current relative weight in the global asset basket and I believe they have much further to climb in price.  One poet’s views.

Good luck

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Squealed Like Stuck Pigs

Posted on by

What many just don’t comprehend
Is tariffs are not near the end
Of policy changes
As Trump rearranges
The world into foe and to friend
 
And while Wall Street squealed like stuck pigs
Trump’s boosters just don’t give two figs
They’re willing to try
The Trump calculi
If they see it hurts the bigwigs

 

I’m old enough to remember when Nonfarm Payrolls were the most important thing to market participants regardless of the asset class.  Ahh, those were the days.  It is remarkable that across major business headlines, I haven’t seen anything discussing the release for later this morning.  Don’t misunderstand me, I’m not upset about that fact, I think there has been far too much focus on that data point for far too long, but I am surprised.  This may be the best indicator that we are in a new regime for finance and economics.  It appears that most of the things the analyst community used to consider important are now merely afterthoughts.

I thought the WSJ had the most consequential article in this morning’s ‘paper’ asking, who is going to buy the $400 billion of stuff that China makes that will no longer be price competitive in the US?  They weren’t mentioned explicitly, but I imagine that Temu and Shein are both going to find their business models significantly impaired.  But will other “free trading’ nations allow all that stuff across their borders tariff free?  The Chinese mercantilist model was built with the idea that if they could produce stuff more cheaply than other nations, whether through subsidy or efficiency, other nations would welcome that stuff.  It remains to be seen how well that model holds up given the changes wrought by President Trump.

On a different note, I have read many comparisons of yesterday’s market declines to the March 2020 Covid panic, but my take is it is far more akin to the September 2008 Lehman Brothers collapse, at least from the tone of the market.  Covid was an exogenous event while Lehman and the tariffs were home-made.  The issue with the GFC and the current time was/is that they are systemic alterations which means that things will be different going forward in finance and economics.  Covid clearly changed our lives based on the government response, but it didn’t change the way markets behaved.  

At this point, there is no indication that President Trump is going to change his tune, and why would he? Again, amongst the key financial market goals he and Secretary Bessent have touted were a reduction in 10-year yields, lower by 75bps since inauguration, (✔️), a reduction in the price of oil, lower by $14/bbl or 18%,  (✔️) and a lower dollar relative to other currencies lower by 6.5%,(✔️).  Ask yourself, do you really think they are unhappy with the current situation?

I have no idea how things will play out from here, and in reality, neither does anybody else.  Reliance on models that were built with past assumptions does not inspire confidence.  As well, we have barely seen the response to these tariffs, although just moments ago China indicated they would be imposing 34% tariffs on all US goods entering their country.  But anybody who believes they know the end game is delusional.  This is the beginning of the change, and there will be much more to come across many different aspects of the economy and markets as the year progresses.  Interesting times indeed.

With that in mind, let’s see how day two of the new world order is playing out (and to think, there were all those conspiracy theories about a new world order before, but this was not what they had in mind.)  Green is a hard color to find on screens again today as after yesterday’s rout in US markets, the follow-through in Asia was almost complete.  Indonesia (+0.6%) managed a gain somehow, but every other major market declined, some quite substantially.  Singapore (-3.0%), Thailand (-3.6%) and Tokyo (-3.1%) were the biggest losers, but shares everywhere fell with most declining more than -1.0% on the session.  Interestingly, European shares are having a much worse session today than yesterday with Italy’s FTSE MIB (-7.1%) leading the way although Spain’s IBEX (-5.5%), the DAX (-4.5%), CAC (-3.8%) and FTSE 100 (-3.5%) are not exactly loving life today either.  As to US futures, they are pointing much lower again today, -3.0% or so for all the major indices.

Bonds, however, are in great demand with yields virtually collapsing as investors seek anyplace that is not equities to find shelter from this storm.  Treasury yields have fallen a further 15bps this morning and you can see in the chart below, just how large this decline has been.  In fact, yields have almost retraced to the level just before the Fed started cutting rates last September!

Source: tradingeconomics.com

But bonds everywhere in the world are in demand with yields on European sovereigns lower by between -7bps (Italy and Greece) and -15bps (Germany) as credit quality has also entered the picture there.  Finally, JGB yields have also tumbled, down -18bps overnight, as Japanese investors flee global markets and bring their money home.

Arguably, though, the biggest move has been in oil (-6.9%) which is now down to levels not seen since it was rebounding from Covid inspired lows back in 2022.

Source: tradingeconomics.com

I would contend this is almost entirely a recession fear, lack of forward demand story, although I believe OPEC+ is still planning on reducing its production cuts as the year progresses.  I imagine the latter is subject to change based on the economic outcomes.  In the metals markets, gold (+0.15%) after a sell-off yesterday, is consolidating for now.  Given the amount of leverage that abounds and given that when margin calls come, folks sell what they can, not what they want to, I suspect much of gold’s selling yesterday was forced rather than based on fear.  Rather, I suspect gold will outperform as it maintains its ultimate haven status.  The same, though, is not true for other metals with silver (-1.5%) and copper (-4.2%) both sharply lower this morning.  Certainly, in copper’s case, given the increased recession fears, it can be no surprise that its price is declining.

Finally, turning to the dollar, after a sharp decline yesterday, largely across the board, this morning the picture is a bit more mixed with a rebound against some currencies (AUD -3.0%, NZD -2.5%, SEK -1.7%, NOK (-2.1% although also inspired by oil’s precipitous decline.). However, both the yen (+1.0%) and Swiss franc (+1.25%) are continuing to display their haven attributes, while the euro (-0.1%) seems caught in the middle.  In the EMG bloc, though, the dollar is quite solid this morning with MXN (-1.9%), ZAR (-1.7%) and CLP (-1.0%) all falling.  Of note, CNY (0.0%) has barely moved throughout the entire process.

As I mentioned above, today we do see the NFP report, although my take is a strong report will be ignored as old regime, while a weak report will be ‘proof positive’ a recession is near.  Here are the expectations as of this morning:

Nonfarm Payrolls135K
Private Payrolls127K
Manufacturing Payrolls4K
Unemployment Rate4.1%
Average Hourly Earnings0.3% (3.9% Y/Y)
Average Weekly Hours34.2
Participation Rate62.4%

Source: tradingeconomics.com

Will the data really matter?  I don’t think so, at least not to policy makers as they realize (I hope) the world today is different than when this data was collected.  At this point, the market is now pricing in a full 75bps of rate cuts by year end from the Fed with a ~30% probability of a cut early next month.  But Powell and company don’t have any idea how this will play out either.  I fear that we are in a market situation where volatility is the dominant theme, in both directions.  Remember, Donald Trump is best thought of as the avatar of volatility.  He has earned that nickname.  This is why I harp on maintaining hedges, the world is a tricky place.

Good luck and good weekend

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