Tag Archives: #treasuries

Simply No Need

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Said Powell, there’s simply no need
To hike rates, we all have agreed
But likewise, no case
To cut, lest we face
An outcome where, jobs, we impede

Said Trump ‘bout the Strait of Hormuz
Be careful and do not confuse
Our aims in this war
As more than before
Which has been, Iran, to defuse

Just like every other day, this morning shows we really have no idea what to believe regarding the war anymore.  The headline in the WSJ is that President Trump may consider the job finished even if the Strait of Hormuz remains closed.  That has certainly gotten the Europeans up in arms as they are the ones relying on its reopening to source much of their oil and LNG.  But consider it from the US perspective, where we source only about 2.5% of our oil related products from nations on the wrong side of the Strait, which means virtually none of our overall import roster (source Grok). 

Now, the one thing I will say about President Trump is that strategic ambiguity is one of his strengths, as he continues to make so many seemingly contradictory statements, nobody knows what he is working to achieve.  Based on the framework that Secretary Rubio laid out again yesterday:

  1. Destruction of Iran’s Navy
  2. Destruction of Iran’s Air Force
  3. Severe diminishment of their missile launching capability
  4. Destruction of their armaments factories

It is not hard to believe the US and Israel are close to their goals.  However, none of this discusses Iran’s nuclear weapons program, which has clearly been a goal, nor the 440Kg of 60% enriched U308 that they retain.  

Again, I wouldn’t dare claim to have any idea when this will end, but the political calculus indicates it is unlikely to go on for very much longer.  However, it is not just the political calculus that implies that, but also market pricing of certain things.  For instance, one of the things that initially surprised me was that Brent crude (+0.6% today) did not initially rise more rapidly than WTI (+2.0% today).  After all, zero WTI transits the Strait and it is not a pricing benchmark for anything that happens over there, while Brent is the basis for all Middle Eastern oil.  As the Strait of Hormuz has been effectively closed since March 4th, a look at the below chart shows that Brent did not separate itself from WTI until 2 weeks later.  But last night, that spread collapsed back to its current $3/bbl, similar to the levels that preceded the onset of the war.

Source: tradingeconomics.com

One interpretation of that price action is that there is a growing belief that the Strait will reopen for transit soon.  Of course, it could simply be that neither Brent nor WTI are representative of the oil grades that are impacted, and thus the large premium no longer makes sense, but given the totality of the news, I’m inclined to lean toward the former idea.  Of course, both benchmarks are currently solidly above $100/bbl so still causing great pain.

However, on this topic, as most of us live and think in a nominal world, we consider $100/bbl as extremely expensive.  But if we take a moment to consider the real (inflation adjusted) price of oil, we can see in the chart below that energy remains pretty cheap, and well below levels seen ahead of the GFC or even in the wake of the Russian invasion of Ukraine.

Source: data FRED, calculations and chart, @fx_poet

My point is that over time, energy has become less of a cost in the economy, and even with the current situation, my take is the US, and frankly global, economy is quite resilient and will get through this.  I’m not suggesting there won’t be some pain, just that this is not going to lead to economic Armageddon.

The other interesting story from yesterday came from Chairman Powell, who in a speech at Harvard explained there was a great deal of uncertainty currently, while admitting that the tariffs were likely a one-off modest inflation pressure.  He indicated rate cuts were likely over, although hikes were possible, and then the man who printed $5 trillion to pay for every one of President Biden’s Covid and ESG bills, explained that debt is growing too fast and could be a problem going forward.   And you wonder why there are those who are skeptical of his concerns over politicization of the Fed.

Ok, let’s turn to markets.  Yesterday’s morning positivity faded all day and both the NASDAQ and S&P 500 closed lower on the session.  That mostly followed in Asia with Tokyo (-1.6%), China (-0.9%), Korea (-4.3%) and Taiwan (-2.5%) all under real pressure, although HK (+0.2%) and Australia (+0.25%) managed some gains.  Other regional exchanges were mixed as investors around the world are trying to figure out the next steps.  At this hour (7:00), US futures are pointing solidly higher, +0.8% or so.  Turnaround Tuesday?  Certainly, that is the case in Europe where despite widely expected higher Flash inflation data for March, green is today’s color with gains ranging from 0.2% (CAC) to 0.5% (FTSE 100) with others somewhere in between.

Bond investors have seemingly turned their views from inflation concerns to growth concerns, at least based on the fact that yields around the world are lower this morning than yesterday.  In fact, since Friday morning, 10-year Treasury yields have fallen -14bps, including -2bps this morning.  in Europe, yields did slide somewhat yesterday, about half that in the US, and this morning they are little changed throughout the continent.  But we did see JGB yields slip -2bps overnight as well.

On the growth side, the Atlanta Fed’s GDPNow is running at 2.0% for Q1, well below its first readings from before the Iran activity, although still in decent shape.  The next update comes tomorrow, so will be interesting to see.  And, of course, the payroll report on Friday will be critical for that reading.  It is, though, still well above the Blue Chip Consensus readings.

We’ve discussed oil, but a quick peek at precious metals shows they are regaining their luster, with gold (+0.8%) and silver (+3.6%) both nicely higher this morning.  As this price action continues, with the current price more than 10% above the spike low from March 23rd, I believe whatever was driving things during the first part of the war, may now have passed.

Finally, the dollar is little changed this morning, but sitting on its recent highs with the DXY at 100.53 as I type.  Here’s the thing about the current level.  As you can see from the long-term chart below, while during the first 4 months of 2025, the dollar did decline sharply, about 10%, the longer history shows that the current level has acted as support for a very long time.  As well, if you take the really long view, we are within spitting distance of the DXY’s average since the 1970’s.

Source: tradingeconomics.com

All I’m saying is the dollar is neither strong nor weak right now, it just is.  It is, though, worth looking at the yen (0.0%) which pushed back to just below 160 during yesterday’s session and got more jawboning from Mimura-san, the Vice Finance Minister for International Affairs (aka Mr Yen) who explained they are ready to take “decisive action” against speculative moves.  But otherwise, this morning’s session is unremarkable with only KRW (-0.6%) continuing to suffer from the energy issues there.

On the data front, we get Case Shiller Home Prices (exp +1.3%) and then Chicago PMI (55.0) and perhaps most importantly, the JOLTs Job Openings (6.92M) report at 10:00.  There are two more Fed speakers, Goolsbee and Barr, but with Powell just having confirmed no moves are coming soon, what can they possibly add to the story?

The war and its headlines remain the key drivers and I don’t see anything changing that dynamic for now.  I wonder if markets are prepared for an announcement that it is ending and Iran has come to terms.  I’m not suggesting that is the likely outcome, just that it would be the biggest surprise, I believe.  In the meantime, there are precious few reasons to sell the dollar outright, that’s for sure.

Good luck

Adf

No Longer Benign

Posted on by 
The war in the Gulf shows no sign
Of ending by any deadline
Some victims now bleeding
Are bonds, with yields speeding
To levels no longer benign

Already we’ve seen, efforts, great
By nations, impacts, to abate
So, price caps on gas
Worldwide came to pass
But will central banks raise their rate(s)?

Nothing of note has changed in the Iran war as the US continues to refrain from further attacks while negotiations to end the conflict ostensibly continue.  Both sides have made their demands, but from what I have read about them, neither side can accept the others wishes.  If pressed, my take is the ongoing US pause is simply allowing the Marines and 82ndAirborne to get into place for their attempt to take over and control Kharg Island and the other small islands in the Strait.  Frankly, I would not bet against their tactical success in that endeavor.  However, it is not clear how Iran will respond in that situation.  After all, if the US does control Kharg Island, that means Iran no longer controls their own revenue stream, and that is truly existential for the regime.  However, I could be completely wrong about this, which is why I am not a military strategist.

But I think it is worthwhile taking a peek at the bond market this morning.  For the first few weeks of the war, while yields edged higher, there was no indication that investors were getting terribly nervous about the longer-term impacts of the war.  However, that no longer seems to be the case.  I have several charts below showing US, UK and German 10-year yields over the past six months, and then a longer-term perspective showing those same yields over the past 20 years. 

Six months of yields

Source: tradingeconomics.com

Long-term charts (source marketwatch.com)

UK Gilts

German bunds

US Treasuries

As you can see from the first chart, yields across all three of these nations have risen sharply now in the past month.  In fact, the numbers are US (+52bps), UK (+83bps) and Germany (+47bps).  It is very clear that fixed income investors are getting worried, and reasonably so given the idea that inflation readings, at least in the short-term, are going to be much higher.  As to the longer-term view, though there is certainly a similarity amongst the movement of yields of all three nations, UK yields are currently at their highest level since the GFC, July 2008; German yields are at their highest level since the Eurozone bond crisis in 2011, but Treasury yields were higher at the beginning of this year, and 25bps higher in late 2023.  

This is not to dismiss the potential problems that may arise if government bond yields continue to rise, especially given the already extraordinarily high debt/GDP ratios that exist throughout the G10.  However, I am not prepared to concede that the US is going to collapse because 10-year yields are back at 4.50%.

What we have seen, though, almost everywhere in the world, is government attempts to cap prices on energy, whether gasoline, diesel or even electricity, to help moderate some of the obvious pain that higher energy prices are inflicting on their populations.  We have also heard a great deal from central bankers about needing to tighten monetary policy to combat the rising inflation, despite the fact that inflation is coming from a supply shock in energy rather than either excess demand or money supply.  I fear that will not work out that well if they do so, but as is often the case, central banks (and governments in general) feel they must “do something” when an exogenous event, out of their control, occurs.  Ultimately, history has shown that is when policy mistakes are made.  Here’s hoping the hostilities end quickly enough so nations don’t make those mistakes.

Away from bonds, with yields higher this morning across the board (US +5bps, Germany +5bps, UK +11bps, Japan +11bps) and the rest of the European sovereigns somewhere in between, if we turn to oil (+2.7%), WTI is pushing back up to $100/bbl this morning, which I take as an indication market participants are getting nervous things will last longer than they thought a few days ago.  You can see the chart below that oil has rallied steadily all week since the Tweet that things were going to be ending soon back on Monday.

Source: tradingeconomics.com

The more interesting price action to me, this morning, is that gold (+0.7%) is also higher this morning, which may be the first session since the first day of the attacks, where both have risen in sync.  There is a story around that Turkey sold 58 tons of gold right when things began, but even at $5000/oz, that is only about $9 billion of gold compared to average daily trading volumes of between $200 billon and $300 billion (according to Grok).  My point is that would not be enough to move markets like we have seen in gold, but it could well be a harbinger of what other nations did as well.  Again, there is no sense that the long history of gold’s role is changing here.

As to equity markets, yesterday’s weakness in the US has been followed across Europe (DAX -1.6%, CAC -1.1%, FTSE 100 -0.75%, IBEX -1.4%) but the picture in Asia was more nuanced.  While the Nikkei (-0.4%) slipped a bit, both China (+0.6%) and HK (+0.4%) managed to rally as did Malaysia, Singapore and Thailand albeit not very much.  On the downside, though, India (-2.2%) made up for the fact it was closed on Thursday, while Korea (-0.4%) and Taiwan (-0.7%) both slipped and the rest of the region edged lower by lesser amounts.  As to US futures, at this hour (7:30) they are lower by about -0.35%.

Finally, the dollar continues to be a major beneficiary of the war as the DXY is back above 100 this morning with several EMG currencies coming under greater pressure today.  We see CLP (-1.1%) feeling the pain of copper’s inability to rally at all, as well as INR (-0.6%) and MXN (-0.5%) suffering this morning.  NOK (+0.2%) continues to benefit from oil’s recent strength, and CAD (+0.1%) is holding its own on the same basis, but both the euro (-0.15%) and pound (-0.2%) are struggling as the energy problem there is a major detriment to their economies.

The only US data this morning is Michigan Sentiment (exp 54.0) while yesterday’s Jobs data continues to show that layoffs are not increasing in any meaningful way, which I believe is a result of the dramatic change in immigration policy as well as deportations.  Like so much of what is ongoing these days, old models regarding the labor market are no longer representative of the new reality on the ground.  I suspect this is true across large segments of the economy which just means that relying on econometric models will be a fraught exercise going forward.  Here is a reason to pity the central bank community as they are truly flying blind now.

And that’s all there is today.  To me, we are biding our time until the Marines land on Kharg Island and then we will see a new phase of the war.  It is a high risk, high reward venture as success would certainly reopen the Strait of Hormuz and oil prices would plummet quickly.  Failure, however, would leave Iran with greater control over that key chokepoint and potentially cause greater difficulties elsewhere in the world, not least because it would call into question the US ability to project power.  War is not only hell, but also incredibly risky.

Good luck and good weekend

Adf

The Abyss

Posted on by 
This month has seen traders dismiss
The idea that risk led to bliss
Stocks worldwide have fallen
And those who were all in
With leverage now face the abyss

But it’s not just war in Iran
That’s scrambled most everyone’s plan
The data, as well
Are heading to hell
With no central banking wise man

As I didn’t write on Friday, and it seems some things happened while I was away, I thought I might offer my views of where things stand as we enter the new week.

🤯🤯 😱😱 🤮🤮

I think that sums it up nicely.

Recapping the end of last week quickly, all the central banks left policy on hold, as was expected with all showing a more hawkish lean given the dramatic rise in energy prices, so far, and fears that food will follow shortly.  The BOE was the most obvious as rather than a 5/4 vote with 4 votes for a cut, it was 9/0 for no movement.  Adding the Thursday decisions to the previous ones from the week, and looking at the Fed funds futures market, the two tables below from cmegroup.com show the change over the past month from modest expectations of a cut at the next meeting to modest expectations of a hike, first:

Then, if we look at the aggregated probabilities, you can see that the market has priced out any cuts for 2026 at this stage, with nothing, really, until the end of 2027.

Now, here’s the thing about this pricing.  It is a current estimation based on the Fed funds futures curve and certainly is subject to massive change going forward.  However, other markets that rely on interest rate cues see this and respond accordingly.

For instance, the 2-yr Treasury note (gray line) also has seen a major yield rally as you can see in the chart below and now sits above Fed funds effective (blue line) for the first time since late 2022 when the Fed finally caught up in its race against the raging inflation of the time.

Source: tradingeconomics.com

So, inflation is once again a major worry of the markets, and investors have come to believe that central banks are not going to be coming to the rescue for their risk assets as their hands will be tied by higher energy prices driving headline inflation higher.  Of course, we all know that central banks raising rates will not adjust short term price inelasticity for energy products, although it could well cause a deep recession which would likely have an inflation impact.  But my take is, that is not their goal either.

And that is why everyone is so unsettled.  The idea that the central banks are going to come to the rescue of risk assets has been killed and now the pricing of those assets needs to rely on their own fundamentals, a much tougher task historically.  

This is especially so given the data from Thursday showed PPI much hotter than expected, which adds to the narrative that the Fed, and other central banks, are on hold, at best, if not getting itchy to hike rates.

With this in mind, we cannot be surprised that equity markets suffered greatly on Friday, as did bond markets and precious metals.  However, I believe the drivers of equities are different than those of the traditional havens of bonds and gold.  In the case of equities, high valuations, which have existed for a long time, and significant leverage, with margin debt at record highs, although as you can see from the chart below, I created from FINRA data, it turned down ever so slightly in February have started to take their toll.

And in fact, that toll on margin debt is being played out in both bonds and gold as both are clearly feeling the effects of massive deleveraging as hedge funds and CTAs all scramble to make their margin calls.  In this case, they sell what they can that is liquid, not what they want to sell, so bonds and gold fit the bill.  My take is if the war continues very much longer, we will see the margin selling diminish and soon, both gold and bonds are going to seem like pretty good places to hide.  (Now, if you want to keep up with inflation, USDi, the fully-backed inflation tracking crypto currency available at www.usdicoin.com) is going to do so far better than short-term interest rates which are almost certainly going to lag inflation for a while going forward!  Ask me about this and I am happy to discuss.)

And that’s all I have this evening.  There is a great deal of back and forth with threats from both sides in the war, and whether or not the Iranian electricity infrastructure is hit, or if their nuclear power plant at Bushwehr is hit and if so, how they retaliate remains unknown and fodder for the narrative writers.  I have no opinion other than I hope none of that happens.

In the meantime, risk reduction is likely to continue as equities suffer while the dollar maintains its value and oil is the real risk, as any indication that the military action is ending is likely to see a major downdraft there.  Unless you are a professional trader, with real capital behind you and a great market and news feed, this is not a time to play in my view. However, if I look at things and where they currently sit as Sunday night opens, gold seems to be too cheap.  For millennia it has served as the last recourse of safety, and I do not believe this war will be any different than any of the countless wars in the past.  This doesn’t mean it cannot go lower, just that it probably is approaching a place of ‘value’ especially as you can be sure that at some point later this year, every central bank will be printing as fast as they can if economies start to stutter.  One poet’s thought.

Let’s see what happens overnight and I will be back again tomorrow.

Good luck

Adf

Not Be Sublime

Posted on by 
Investors are starting to shun
The riskiest things one-by-one
So, stocks feel the pain
And bonds, too, feel strain
The dollar, though’s, on quite a run

It’s nearly two weeks since this started
And so far, no ending’s been charted
The impact o’er time
Will not be sublime
Thus, trading’s not for the faint-hearted

Another day and there is no end in sight for the ongoing military action in Iran.  US strikes continue apace and Iranian retaliation also continues, albeit at a lesser rate it seems.  However, the information from the war zone remains difficult to trust as all of it is spun for various audiences with no sense of objective truth.  As such, it is difficult to have an opinion on how long this will continue.

With that in mind, all we can do is observe market behavior and see what we can glean.  Starting with equity markets around the world, the below screenshot from Bloomberg.com this morning shows that risk is clearly off, although not catastrophically so, at least not yet.

So, weakness in the US yesterday was followed by weakness overnight in the major markets in Asia as well as in other regional markets (Korea -1.7%, India -1.9%, Indonesia -3.1%) with the rest having declined by lesser amounts.  It is important to see that all the Asian markets (and European and US markets) have fallen in the past month, but remain higher, in some cases substantially so, since this time last year.  The point is that this move can still rightly be considered corrective, rather than a dramatic change in opinion.

European bourses are demonstrating similar behavior although US futures at this hour (6:45) are slightly higher, about +0.15% across the board.  Thinking about equity markets overall, one of the main features of the US market was that it maintained a relatively high P/E ratio, no matter whether measured on a forward looking or historical basis.  Thus, a correction in equity prices, even absent the war, would not have been that surprising.  The same could not be said about European or Asian markets, which trade at much lower valuations, but then, in Europe especially, prospects for growth remain hampered by individual national domestic policies along with EU wide policies, notably in the energy sector.    Under the rubric a picture is worth 1000 words, it is not hard to understand why US equity markets dominate global markets.

Source: tradingeconomics.com

Germany has averaged -0.3% GDP growth over the past 3 years, and the EU is just above it at +0.4%.  Meanwhile, this morning’s UK GDP data showed weaker than expected outcomes, with Y/Y of 0.8% after a stagnant January.  Are US markets richly priced?  Sure, but what prospects do you have elsewhere?

Turning to bond markets, the traditional safe haven appeal of bonds, especially Treasuries and Bunds, is MIA.  While this morning, Treasuries (-1bp) and most European sovereigns (-1bp across the board) have seen prices stop declining, the picture over the past two weeks has not been encouraging.  The chart below shows the price action in both Treasuries and Bunds and, as you can see, both have seen yields rise sharply since the beginning of the month/war.  Given the ongoing stress in oil markets, and the implications that has for inflation worldwide going forward, it should not be a surprise that bonds don’t appear to offer their ordinary haven characteristics.

Source: tradingeconomics.com

The big question here, and around the world truthfully, is how will central banks respond to the rise in energy prices and subsequent rise in headline inflation?  If they try to address price pressures by raising rates in this scenario, it will almost certainly lead to recessions everywhere.  But will their models allow them to hold their policies if inflation starts to rise sharply?  It’s funny, I have been remarking how central bank policies have lost their luster recently, having been overwhelmed by fiscal policies, but suddenly, monetary policy is back in the limelight.  We shall see how they perform.

In the commodity markets, WTI (-1.3%) rallied sharply yesterday but is giving back a bit this morning.  The big headline yesterday was that Brent crude closed above $100/bbl for the first time since 2022 in the wake of Russia’s invasion into Ukraine.  Of course, that was more about the big, round number feature, than the percentage rise.  After all, is there really a difference of $98/bbl or $100/bbl in the broad scheme of things?  Oil continues to be THE driving factor in all markets right now and that is not likely to change anytime soon.  As long as the Strait remains closed to traffic, this pressure will continue to build. 

In the metals markets, both gold and silver continue to consolidate around their recent levels ($5100 in gold, $85 in silver) and it appears we are going to need another catalyst of note to get that to change.  I see no change in supply metrics, that’s for sure, but if there is a recession, silver demand may well be reduced given its industrial uses.

Finally, the dollar is king of all it surveys, at least in the FX markets.  The euro is below 1.15 (it seems like only last week that pundits were talking about the consequences of the euro trading above 1.25.  The DXY has broken above 100, although we will need to see an extension of this move to be convinced that it is going to head much higher, and USDJPY is now pushing near 160 again, which brought out comments from Katayma-san, the Japanese FinMin, about closely monitoring the yen’s value.  Of course, given the broad-based rise in the dollar, the current yen weakness cannot be seen as that troubling.

But what is a bit more interesting to me, and more definitive proof that the dollar is not about to collapse, is the coincident moves higher in the dollar vs. a number of other currencies.  Look at the chart below of ZAR (-0.15%), SEK (-0.3%) and MXN (0.0%).  Each demonstrates virtually identical trade patterns, and all of them reached their respective peaks (dollar’s nadir) on January 29th.  You may recall that was the day president Trump named Kevin Warsh as the next Fed Chair, and we saw a major reversal in stocks, gold, silver and other markets.  

Source: tradingeconomics.com

My best estimate is that FX markets are pricing in a tighter Fed at this point, which. Based on Fed funds futures, showing just one cut potentially this year in December, makes a lot of sense.  I guess it remains to be seen how other central banks will respond to the ructions in markets caused by the war, but this is the first order consequence.

Source: cmegroup.com

Turning to this morning’s data, we see a bunch as follows: 

Q4 GDP (2nd estimate)1.4%
Personal Income0.5%
Personal Spending0.3%
Durable Goods1.2%
-ex Transport0.5%
PCE0.3% (2.9% Y/Y)
Cpore PCE0.4% (3.1% Y/Y)
JOLTs Job Openings6.7M
Michigan Sentiment55.0

Source: tradingeconomics.com

As with Wednesday’s CPI data, the PCE data does not include the war, so will be dismissed.  My take is the Income and Spending numbers, and the JOLTs number will be the most impactful if they are a long way from estimates.  

And that’s where we stand.  Markets are still unsure of what to believe regarding the war, and when it comes to war, things happen that are unexpected all the time, the so-called unknown unknowns.  In the end, it is hard to bet against the dollar for right now, but that could change in an instant based on the next headline.

Good luck and good weekend

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Bonds are a Flop

Posted on by

The war has now widened in scope
And though all of us truly hope
It won’t last too long
We could, there, be wrong
As such we must all learn to cope
 
So, oil, right now, knows no top
While havens like bonds are a flop
There’s no place to hide
Thus, you must decide
If trading makes sense or should stop

Carl von Clausewitz, the 19th century Prussian military strategist, is credited with describing the fog of war in his 1832 book, On War.  “…three quarters of the factors on which action in war is based are wrapped in a fog of greater or lesser uncertainty.”  This is quite an apt description of things, even now with cameras literally everywhere in the world.  Context remains difficult to understand, and, of course, there is an enormous amount of propaganda from both sides of any conflict as the protagonists attempt to sway both their own populations and those of their opponents.

I highlight this because I continue to be amazed at the certitude with which some analysts proclaim to “know” how things will turn out.  As I have written elsewhere, nobody knows nuthin right now.  With that in mind, I would highlight the IMF’s statement yesterday which added exactly zero to the conversation, “It is too early to assess the economic impact on the region and the global economy. That impact will depend on the extent and duration of the conflict.”  Now, don’t you feel educated after that pronouncement?

At any rate, with more than a full day’s trading in financial markets, perhaps we can try to assess how things are going.  The first thing to note is that many alleged haven assets are not performing up to snuff, notably Treasury bonds, Japanese yen, Swiss francs and gold.  In fact, as of this morning, the only traditional haven that is performing as expected is the dollar.

It was just over a month ago when the cognoscenti were explaining that the euro above 1.20 was indicative of the dollar’s long decline into the depths of history.  I recall someone in my LinkedIn feed asking how soon the euro would trade through 1.25 and beyond.  I would argue that timeline has been extended somewhat, if you still believe that is likely to be the case.  Rather, as you can see in the below chart, the single currency (-0.8%) is now back below 1.1600.

Source: tradingeconomics.com

There are several things weighing on the euro right now.  First is the fact that they are energy price takers for every form of energy, so not only are higher oil prices hurting the continent, but NatGas there has exploded higher as per the below chart, rising 37% today and nearly 95% since the weekend.

Source: tradingeconomics.com

Recall, Europe has been trying to wean themselves off Russian gas, have been huge buyers of US LNG but also huge buyers of Qatari LNG, and with the Strait of Hormuz effectively closed (shipowners cannot get insurance so nobody transits the Strait), this is a problem.  Adding to the European problem is the fact that their storage levels of NatGas are extremely low for this time of year, about 30%, when typical levels in early March are near 50%.  We cannot be surprised at this price action.  So, while US NatGas (+6.3% this morning, 10% this week) has risen, it is currently trading at $3.14/MMBtu.  The comparable Eurozone price is $20.28/MMBtu.  Perhaps a weaker euro is not that surprising after all.  (As an aside, one of the reasons I find it difficult to accept the weak dollar story is that the US controls its own energy destiny and given energy is life and the economy, we are fundamentally in better position to perform going forward.)

But the dollar is strong against all comers again today as per the below table from 7:10 this morning.  Will this continue?  While nobody knows, my take is there is still ample room for further strength in the buck, probably another 3%-5% before it starts to impact other things significantly.

Source: tradingeconomics.com

I think the biggest surprise for most of us is the incredibly poor performance of the bond market, which has always been seen as a safe haven.  However, this morning, that is not the case at all as you can see from the Bloomberg table below.

My take is that there is only one thing we truly know about war, it is inflationary.  While the early signs are for energy prices to rise, war is a major consumer of resources that will never be recycled and therefore will require new baseline production.  As well, governments don’t fight war on an austerity budget, so you can be sure that there will be plenty of money around.  All that leads to higher prices and that is why bond markets are feeling pain around the world this morning.  If, as President Trump has indicated, this war ends in the next 4 weeks or so, we will be able to re-evaluate the inflationary and other impacts, but while I had thought bonds were going to perform well, clearly that is not the case right now.

Turning to commodities, oil (+6.75%) continues to rise and I expect will remain well bid until the fighting stops.  The prospects for higher prices from here remain dependent on whether Iran tries to destroy other Middle East production facilities and if they are successful.  Meanwhile, in the Western hemisphere, the US, Canada, and all of Latin America are going to be pumping at full strength for now.  So, while prices may tick higher, it is unlikely we will see any supply issues here.

Metals are another surprising trade this morning with gold (-2.65), silver (-7.8%) and copper (-2.3%) all sharply lower.  Given the sharp decline in equity prices I will discuss below and given the amount of leverage that is rampant in the equity markets, I think gold is a victim of ‘sell what you can, not what you want to.’  Arguably, there is some of that with bonds as well.  In a way, though, I am more surprised about silver and copper given their criticality in fighting the war.  Both are being consumed rapidly via weapons being deployed so this is more baffling to me.  However, I do not believe the longer-term thesis in either of these metals has changed, there is a supply shortage relative to industrial usage for both with no new supply on the horizon.  As such, I do see prices here rallying over time.

Finally, the equity markets are sharply lower almost everywhere.  The below Bloomberg table shows how major markets in Asia performed overnight and how Europe stacks up at 7:30 this morning.

What it doesn’t show is that the KOSPI in Korea fell -7.25%, nor that there were sharp declines in India (-1.3%), Taiwan (-2.2%) and Thailand (-4.0%).  You will also not be surprised that US futures are pointing much lower this morning, -1.5% across the board.  Yesterday’s performance was quite the surprise, I think, but today is much more in line with what we expected.

And that’s where things stand this morning.  obviously, the war is the only story that matters, so data releases are going to be secondary for now, even Friday’s payroll report.  At some point, I expect that traditional havens will play their role, but as leveraged positions continue to get unwound, it may take a few more sessions before we see that.  If you’re trading, smaller sizes make sense.  If you’re hedging, stick to longer term fundamentals I think.

Good luck

Adf

Not Existential

Posted on by

The story that has the most traction
Continues to be the reaction
To stories AI
Will force firms to try
To profit from worker subtraction
 
The tech nerds see naught but potential
For robots plus, workers, essential
But history’s shown
Employment has grown
And new tech’s threat’s not existential

Block, the payments processing company announced during its earnings call that it would be laying off 4000 employees, nearly half its workforce, by the end of Q1 this year.  This was not a response to weak performance, but rather the founder, Jack Dorsey’s, belief that AI has reached the point where his company can be more effective with much fewer staff.  Of course, this is the entire AI argument compressed into a single event.

Recall Monday’s note and market response to the Citrini Research article that explained one scenario from AI adoption would be massive layoffs, a recession and a major stock market decline by 2028 as companies eliminated people from their processes.  This brought about a tremendous amount of back and forth with economists and historians explaining that every major technology creation (e.g. electricity, the automobile, the internet) was both disruptive but instrumental in expanding economic activity.  This morning’s WSJ had a nice summation by Greg Ip of the entire discussion.

It strikes me that this discussion is only beginning and we are going to hear from proponents of both sides for many months to come, although I imagine it will not be the top story every day.  As I consider the issue, I think back to John Maynard Keynes forecast in 1930 that the rapid advancement of technology would lead to a 15-hour workweek as all our needs could be met with much less effort.  Obviously, that was not his best forecast.  Rather, Jevon’s Paradox comes to mind, which states that as technology increases the efficiency with which a resource is used, the total consumption of that resource increases, it doesn’t decrease.  In this discussion, that resource is human labor.

FWIW, my view is AI is a remarkable tool for certain things but is neither sentient nor capable of breakthroughs on its own.  It is a wonderful research tool, and a wonderful computer programming tool, but as my experience taught me, people like to deal with people, not with machines, even when there are machines available to do the job.  Economic dislocation in certain areas is likely going forward, but not collapse, at least not because of greater usage of AI tools.

I highlight this because, while Block’s stock price rallied sharply in the aftermarket, up more than 20%, US futures are lower this morning by -0.5% or so as there continue to be fears about the dystopian outcome.  Remember, Nvidia had terrific earnings and the stock fell as well.  Of course, this could also be a response to the fact that the price of many equities is extremely rich on a P/E basis or a P/S basis, and we are simply seeing a little reversion to the mean.  

At any rate, as no war in Iran has begun and there have been no other changes on the geopolitical map, let’s tour markets to see how things look as we head into the weekend and month end.

Yesterday’s desultory equity performance in the US was followed by a mixed picture in Asia with the Nikkei (+0.2%) and Hang Seng (+1.0%) closing the month higher, but China (-0.3%), Korea (-1.0%) and India (-1.2%) all falling.  Malaysia (-1.4%), too, stands out for a poor session but the rest of the region was mixed with much smaller moves.  Given the tech heavy makeup of most of these nations’ bourses, I suspect that volatility will be the main feature going forward.  As to Europe, it’s a sleeper with continental bourses all +/- 0.2% or less while the UK (+0.35%) managed a modest rally after a by-election resulted in PM Starmer’s Labour party coming in 3rd place in a seat they have held for 100 years.  This appears to be adding pressure on Starmer to do something, or on Labour to remove him, but a key concern is they will move further left, something which I doubt will help the UK economy or stock market.

Turning to the bond market, yields are declining all around the world with Treasuries slipping -5bps yesterday and another -2bps this morning, now below the 4.00% level.  In fact, a look at the chart below shows a pretty strong trend lower in yields.

Source: tradingeconomics.com

But we saw European sovereign yields slide yesterday and continue lower by another -1bp to -2bps this morning and last night, JGB yields fell -4bps and showing a very similar trend to Treasury yields as per the below.  It seems that concerns over too much debt issuance driving yields higher have been put on the back burner for now.

Source: tradingeconomics.com

In the commodity space, it appears that Iran fears are making a comeback as oil (+2.1%) has rebounded sharply from the levels seen in the wake of the massive inventory build I described yesterday morning. It sure looks like somebody bought a lot of oil yesterday morning at around 9:45am, although I have no guess as to who it would have been.

Source: tradingeconomics.com

Interestingly, the news from Geneva is that the talks are going to continue next week, so while both sides are disputing the other’s version of things, the fact they are still speaking is a huge positive.  I fear given the military buildup, some type of action will occur, but we can be hopeful. 

Meanwhile, in the metals space, gold (+0.1%) is little changed for the past several sessions, consolidating just below the $5200/oz level.  Whatever the narrative may be here, regarding central bank buying and the end of the dollar system, this tells me that the market is tired and needs some R&R before moving forward.  I remain bullish, but not today.

Source: tradingeconmics.com

Silver (+1.7%) is showing very similar price action to gold, albeit with a bit more daily volatility.  The story here about a short squeeze for COMEX delivery is fading from the FinTwit feeds, but the structure remains not enough of the stuff for industrial usage going forward.

Finally, the dollar, this morning is, net, doing very little.  But there are two stories to note.  The first is CNY (-0.2%) where the PBOC changed its risk reserve rules for foreign exchange holdings for Chinese banks, reducing the required reserve to 0% from 20%.  In practice, this means that Chinese banks can run forward positions without a capital charge and allows them to be more competitive pricing forward sales of CNY for local hedging counterparts.  Obviously, this is a huge adjustment and speaks to the fact that they must be getting a bit uncomfortable with the speed with which the renminbi has been rising over recent months.  Ironically, there was a Bloomberg article highlighting how options traders were paying up for 6.50 CNY calls/USD puts anticipating further CNY strength.  Perhaps the PBOC didn’t like that!

The other story is from Hong Kong, where the currency is usually not an issue as it is pegged in a very tight band to the USD, allowed to trade between 7.75 and 7.85.  The HKMA (HK’s central bank) is committed to buying and selling HKD as necessary to maintain that band.  This has been a key feature of Hong Kong’s financial attractiveness for the past decades.  The way this operates is there is an exchange fund that is designed to be used only for FX intervention, and it has ~HKD 4 trillion in balances (~$510 billion) which, given their GDP is only $400 billion or so, seems like plenty.  Well, as always seems to be the case, the government there is proposing taking some of that money to use for financing a government project, a technology hub being built, and since they don’t want to raise taxes, they thought raiding that fund would be the answer.  The concern is the precedent it sets as if that goes through, what is the next project that will be determined to need the funding.  If we know one thing about governments it is that if they find a pot of money they can tap to spend more without raising taxes, they are going to do it!  The amount in question is a small fraction, just $19 billion, so would not likely impact the HKD peg.  But this is something to watch as it will not be a positive if we see this a second time.

Otherwise, NOK (+0.5%) is gaining on oil’s gains while KRW (-0.5%) is slipping on the equity market decline and foreign sales.  Beyond that, nothing.

On the data front, this morning brings headline PPI (exp 0.3%,2.6% Y/Y) and core (0.3%, 3.0% Y/Y) as well as Chicago PMI (52.8).  Regarding the last, a look at the chart below shows that last month’s reading was the highest since November 2023 and is arguably a good sign that we are seeing increased industrial activity in the middle of the country.  Recall, the Chicago number is often seen as a precursor for the economy as a whole.

Source: tradingeconomics.com

And that’s it.  Given equity market performance this month has been flat to slightly negative, it seems unlikely there will be large rebalancing flows.  I continue to look for quiet markets although the trend in bonds does seem like it is building up some steam.

Good luck

Adf

Overrun

Posted on by

We’ve not even gone through a week
Yet Trump, so much havoc did wreak
This poet will claim
That in this ballgame
It’s top first, one down, so to speak
 
The impact of what has been done
Is widespread and hits everyone
So, please understand
Whatever you’ve planned
May, by events, be overrun

 

Venezuela continues to be the primary discussion point in both the media and the markets.  Mostly along political lines there are calls that the weekend’s action was illegal or not, and as Brent Donnelly, a very good follow on X (@donnelly_brent), explained after reading voluminous material, the raid was either all about the oil or had nothing to do with the oil. I feel like that sums things up pretty well.

While this poet has views on the ongoing issues, they are set from afar with no inside knowledge so keep that in mind.  But ultimately, my take is the opportunity for real change has come to Venezuela, something that did not exist while Maduro was still there.  If nothing else, the ability for the US to exfiltrate him must have made a strong impression on acting president Rodriguez and the generals overseeing the army and police forces there and ought push decision making in a positive direction, at least for a while.  What seems abundantly clear, however, is that most of the population is ecstatic at his removal and have hope for a future, something missing for decades.

As to the oil, it is heavy, sour crude, something Gulf coast refineries are tuned to use, but the infrastructure there is a disaster.  My take is the one thing that is underestimated is just how remarkable the technology of oil exploration and production has become, and its ability to solve problems in efficiency to reduce the cost of extraction.  I will take the under on the time it takes to increase production there, although a key bottleneck is the electric grid which must be addressed as well.  Nonetheless, despite the rise in oil prices during yesterday’s session, I maintain my view that the trend is lower.

Other than domestic political news there seems little else to discuss but market activity, so let’s go there.  A strong session in the US yesterday was followed by plenty of strength in Asia with Japan (+1.3%), China (+1.6%) and HK (+1.4%) all having excellent outcomes.  Too, Korea (+1.7%) and Taiwan (+1.6%) had strong showings with many more gainers than losers in the region.  The one market that has not partaken in the early year rally is India (-0.4%), which I can only ascribe to the fact they may be losing a source of cheap oil.  Or perhaps, more accurately, all the buyers of sanctioned oil may find themselves in more difficult straits, paying full price, as the dark fleet of tankers is suddenly having more trouble making the rounds.

On this note, one other place to watch is Iran, where it appears that the regime may be set to collapse as protests grow and some cities may have been completely taken over by the protesters.  If the theocracy falls, I would expect that, too, will pressure oil prices lower, as sanctions could be swiftly lifted.

Turning to Europe, does anybody really care anymore?  No, seriously, markets there are mixed this morning with France (-0.4%) lagging while the UK (+0.7%) is gaining on the back of BP and Shell and the general euphoria about the oil majors now.  Meanwhile, other major markets have seen modest gains (Italy +0.4%, Spain +0.3%, Germany +0.2%) but there is one outlier, Denmark (+2.1%) which, given all the talk of the US seeking to take control of Greenland, seems odd to me.  I can find no specific news either for the economy or any companies (Novo Nordisk being the only one of note), but something is going on.  As to US futures, at this hour (6:50) they are little changed.

Turning to the bond market, the below chart of the 10-year offers a great picture of what it means when traders say nothing is going on.  Since early September, the bond has been trading within a 20 basis point range despite all the huffing and puffing of the punditry and the FOMC’s rate cuts.

Source: tradingeconomics.com

If bond investors are the “smart” money, I would argue that right now they have no opinion, or perhaps their opinion is that the economy is going to continue to tick along at a decent rate, with limited extra inflationary pressure.  To that last point, an article in the WSJ this morning explained that several recent studies, one by the SF Fed, demonstrated that tariffs have virtually no inflationary impact.  That probably doesn’t help Powell’s talking points.  While I continue to be concerned that inflation will maintain a 3+% level, I also believe the Fed is going to suppress interest rates going forward, net, bonds don’t seem that exciting.  As to the overnight price action, Treasury yields backed up 2bps, while European sovereigns slipped between -1bp and -2bps.  I couldn’t help but also notice that yesterday saw a massive issuance of USD bonds by non-US corporates, over $60 billion, an indication to me, at least, that calls for the death of the dollar are somewhat premature.

Commodities continue to be where all the action is, or perhaps more accurately, metals markets.  After massive rallies yesterday, we are seeing follow through with gold (+0.4%), silver (+2.4%), copper (+1.0%) and platinum (+3.2%) all strong again.  Unlike the bond market, and truly FX, which is also dull and boring, the below chart shows just how much things in the metals space have changed over time. 

Source: tradingeconomics.com

My take is that investors are still trying to figure out the implications of the fact that old relationships like the dollar falling when metals rise, or metals falling when real interest rates rise, are broken and what that implies for the future.  The reality is that other than gold, which is the calmest of them all, these metals are indicating actual shortages for users.  Consider that, according to Grok, the typical catalytic converter uses between 0.1 and 0.25 troy ounces of platinum, so at today’s price, between $230 and $575.  Given the average price of a new car is ~$50K, paying up for platinum is not going to change the equation that much, certainly relative to not having the platinum and therefore not being able to complete and sell the vehicle.  I suspect that metals, while likely to be volatile in their price action, have much further to run higher.

Lastly, the dollar…is still there.  Using the DXY as my proxy this morning, you can look at the chart below for the past year and see, it has basically not moved since it stopped declining in late April 2025.  It is hard to get excited about things right now.  However, I maintain that the US will remain the cleanest dirty shirt and benefit accordingly over time.

Source: tradingeconomics.com

On the data front, Services (exp 52.9) and Composite (53.0) PMI are released this morning with both expected lower than last month, but still in expansion territory.  We also hear from Richmond Fed governor Barkin, but it seems the Fed has taken a back seat to Venezuela lately, at least with respect to what is driving markets.  As of this morning, there is just a 16% probability of a rate cut priced in for the end of the month with a 53% probability priced for the March meeting.  But two more cuts are seen as a certainty by September, although if GDP continues to perform like it has, I imagine that will change.  According to the Atlanta Fed’s GDPNow model, Q4 is forecast at 2.7%.  We shall see how that evolves over time.

Summing it all up, the dollar is an afterthought in markets right now and seems unlikely to move very much in the near term.  Metals remain the place to be, and nothing indicates those trends have ended.

Good luck

Adf

All But Assured

Posted on by

A cut has been all but assured
Though since last time we have endured
Some fears Jay’s a hawk
So, when he does talk
Will this cut, at last, be secured?
 
And now there’s a narrative view
Though rates will fall, what he will do
Is try to convey
Now it’s out the way
Another one may not come through

 

Good morning all and welcome to Fed Day.  The question, of course, is will this be a frabjous day?  As I write this morning, the Fed funds futures market continues to price a roughly 90% probability of a 25bp cut this afternoon, but the prospects for future rate cuts have greatly diminished as you can see in the table below from the CME.

It wasn’t long ago when the market was pricing 100bps more of rate cuts by the end of 2026, meaning a Fed funds rate of 2.50% – 2.75%.  However, the narrative has shifted over the past several weeks after very mixed signals from FOMC speakers and data releases that have indicated the economy is not cratering (e.g. yesterday’s JOLTS data printing at 7.658M, >400K higher than expected).  You may recall that shortly after the last FOMC meeting at the end of October, the probability of today’s rate cut had fallen to just 30%.

It appears that the new discussion point is this will be a hawkish cut, an idiom similar to jumbo shrimp.  At this point, the bulk of the discussion has been around how many dissents will be recorded with the subtext being, what will Chairman Powell have to promise potential dissenters in order to bring them along to his side of the ledger.  My take is if you thought the last press conference was hawkish, you ain’t seen nothin’ yet.  In fact, I would not be surprised to see a virtually categoric call to this being the end of the cutting cycle for the foreseeable future.

Remember, we also will see the new dot plots and SEP which will help us understand the broad picture of where FOMC members currently stand on the matter.  Personally, I expect to see a wide disparity between the ends of the distribution, and it wouldn’t surprise me to see some expectations of no rate changes for 2026 with other calls for 150bps of cuts and no consensus view at all. 

At this point, all we can do is wait.  However, the market discussion has centered on the fact that 10-year Treasury yields (+1bp) have been climbing lately, and that this morning they have touched 4.20% again while, at the same time, 2-year Treasury yields (no change) have been slipping as per the below chart I created from FRED data.

The steepening yield curve, which now appears to be turning into a bear steepener (when long dated yields rise more quickly than short-dated yields) is ringing alarm bells in some quarters.  The narrative is that there are growing concerns over both the quantity of debt outstanding and its rate of growth as well as the fact rate cuts will engender future inflation.

A key part of the discussion is the fact that what had been a synchronous system of global central bank policy easing is now starting to split up.  While we have known the BOJ is in a hiking cycle, albeit a slow one, today, the BOC is not only expected to leave rates on hold but explain they have bottomed.  We have heard that, as well, from the RBA earlier this week, and the commentary from the ECB may be coming along those lines.  So, is the US the outlier now?  And will that weaken the dollar?  Those are the key questions we will need to address going forward.

But before we move on, there is one market I must discuss, silver, which exploded to new historic highs yesterday, trading through $60/oz and is higher again this morning by 0.6% and trading at $61/oz.  someone made the point yesterday that for the second time in history, you need just 1 ounce of silver to buy one barrel of WTI.  The first time was back during the silver squeeze in January 1980, but that was quite short-lived (see chart below from macrotrends.com).  This one appears to have legs.  

I don’t know that I can find another indicator that better expresses my views of fiat currency debasement alongside an expanding availability of oil.  To my mind, both these trends remain quite strong, and this is the embodiment of them both combined.

Ok, so as we await the FOMC, let’s see if anybody is doing anything in financial markets of note.  As testament to the fact that virtually everybody is awaiting the Fed this afternoon, US equity markets barely moved yesterday, and Asian markets were similarly quiet, with only Taiwan (+0.8%) moving more than 0.4% in either direction.  The large markets were +/- 0.2% overall.  In Europe, the movement has been slightly larger, but still not impressive with Germany (-0.4%) the laggard of note while the UK (+0.3%) is the leader.  A smattering of data released from the continent doesn’t seem to be having any real impact, nor did comments by Madame Lagarde claiming the rates are in a good place and displaying some optimism on future GDP growth.  Of much greater concern is the headlong rush to a digital euro CBDC, where they are seeking to exert control over the citizenry.  If for no other reason, I would be leery of expecting great things from the Eurozone going forward.  Not surprisingly, at this hour (7:30) US futures are little changed ahead of the meeting.

In the bond market, yields are creeping higher all around the world with European sovereign yields higher between 2bps and 4bps this morning.  Perhaps investors are taking Madame Lagarde’s views to heart.  Or perhaps the fallout from the recently released US National Security Strategy, where the US basically dismisses Europe as strategic, has investors concerned that European governments are going to be spending that much more on defense without having the financial wherewithal to do so effectively, thus will be borrowing a lot and driving yields higher.  At this point, European sovereign yields have risen to levels not seen since the Eurozone bond crisis in 2011, but it feels like they have further to climb (see French 10-year OAT yields below from Marketwatch.com).

In the commodity market, oil (+0.5%) cannot get out of its own way.  While it is a touch higher this morning, it sits at $58.50/bbl, and that long-term trend remains lower.  We’ve already discussed silver and gold (-0.25%) continues to trade either side of $4200 these days, biding its time for its next move (higher I believe).  Copper (+1.4%) is looking good today, although it is hard to find economic news that is driving today’s price action.

Finally, the dollar is a touch softer this morning, about 0.1% in the DXY as well as virtually every major currency in the G10.  Interestingly, today’s outlier is SEK (+0.4%) which is rallying despite data showing GDP (-0.3%) slipping on the month while IP (-6.6%) fell sharply.  As to the EMG bloc, there is very little movement of note with the biggest news this evening’s Central Bank of Brazil meeting where they are expected to leave their overnight SELIC rate at 15.0% as inflation there, released this morning at a remarkably precise 4.46% continues to run at the top of their target range of 3.0% +/- 1.5%.

Ahead of the FOMC, we only see the Employment Cost Index (exp 0.9%), a number the Fed watches more closely than the market, and we hear from the BOC who are universally expected to leave Canadian rates on hold at 2.25%.

And that’s really it.  I wouldn’t look for much movement ahead of the 2pm statement release and then the fireworks at 2:30 when Powell speaks can drive things anywhere.  The most compelling story will be the number of dissents on the vote, as there will almost certainly be several.  According to Kalshi, 3 is the majority estimate.  With President Trump continuing to discuss the next Fed chair, I have a feeling there will be 4 and that will be a negative for bonds (higher yields) and a short-term negative for the dollar.  In fact, it is just another reason to hold precious metals.

Good luck

Adf

It Won’t End Well

Posted on by

From Europe, we’re hearing some squawks
They’ve not been included in talks
‘Bout war and Ukraine
So, to inflict pain
They’ve threatened a US detox
 
It seems they believe if they sell
All Treasuries held we would yell
Please stop, it’s too much
And lighten our touch
Methinks, for them, it won’t end well

 

Markets continue to be dull these days.  While we are clearly not in the summer (it is 15° here in NJ this morning), doldrums certainly seem to be descriptive of the current situation.  Equities bounce back and forth each day, neither trading to new highs, nor falling sharply.  The same is true with the dollar, with oil, with gold of late and even, on a slightly longer-term view, of Treasury bonds.  I guess that could be the exception, depending on your horizon, but as you can see from the chart below, it has been several months since 10-year yields have traded outside the 4.0% – 4.2% range.

Source: tradingeconomics.com

Now, much digital ink has been spilled trying to explain that the latest 15bp rise in yields is a signal that the US economy is about to collapse under the weight of its $38+ trillion in debt, but I sense that is more about reporters trying to get clicks on their articles than a reflection of reality.

However, this morning I saw a story that I think is worth discussing, even though it is only a hypothetical.  Making the rounds is the story that Europe and the UK are extremely unhappy with President Trump’s approach to obtaining a peace in Ukraine and so have threatened their so-called ‘nuclear option’ of selling all their Treasury holdings to crash the US bond market and the US economy alongside it.  From what I have seen, if you sum up all the holdings in Europe and the UK it totals $2.3 trillion or so, although it is not clear if that is controlled by the governments, or there are private holdings included.  My strong suspicion is the latter, although I have not yet been able to confirm that.

But let’s assume those holdings are completely under the control of European central banks and governments and they decide that’s what they want to do.  What do you think will happen?  Arguably, much depends on how they go about selling them.  After all, it’s not as though there is anybody, other than the Fed, who can step up and show a bid on the full amount.  So how can they do this?  I figure there are only two viable options:

  1. They can sell them slowly and steadily over time, perhaps $200 billion/day (FYI daily Treasury market volume averages about $900 billion).  That would clearly put significant downward pressure on prices and push yields higher but would likely encourage the hedge fund community to double up on the bond basis trade thus slowing the decline.  However, if they did that for 11 days, US yields would undoubtedly be higher.  Too, remember that if the market started to get unstable, the Fed would step in and absorb whatever amount they deemed necessary to prevent things from getting out of hand.
  • Perhaps, since their ostensible goal is to destabilize the US bond market, they would literally all coordinate their timing and try to sell them all at once.  At that point, since nothing happens in the bond market without the Fed being aware, it would likely have an even smaller impact as the Fed would certainly step in and take down the entire lot.  After all, through QT, their balance sheet has shrunk about $2.3 trillion over the past 18 months, so they have plenty of capacity.

My point is, I believe this is an empty threat, as it seems most European threats tend to be.  Consider that the Eurodollar market remains the major source of funding throughout Europe, and it requires collateral (i.e. Treasury bills and bonds) in order to function.  If Europe no longer had that collateral, it feels like they might have a lot more problems funding anything on the continent.  

Another issue is that if we assume they successfully sell all their Treasuries, that means they will be holding $2.3 trillion in cash.  Exactly what are they going to do with that?  If they convert it into euros and pounds, the dollar will certainly fall sharply, meaning both the euro and pound will rise sharply.  Please explain how that will help their economies and their exporters.  They are getting killed right now because their energy policies have made manufacturing ridiculously expensive.  See how many cars VW or Mercedes sells overseas if the euro rallies 15%.

Now, the article linked above is from the Daily Express, not a website I trust, but they reference a WSJ article.  However, despite searching the Journal, and asking Grok to do the same, I can find no actual article that mentions this idea.  Ostensibly, if you want to search, it came out on December 1st, although if that is the case, why is it only getting press now?

It is a sign of the absence of market news that this is a story at all.  With market participants inhaling deeply so they may hold their breath until 2:00 tomorrow afternoon when the FOMC statement is released, they need something to do.  I guess this was today’s distraction.  As I said above, this is clickbait, not reality.

Ok, let’s tour markets. US equity market slipped a bit yesterday and Asian markets were dull as well with modest gains and losses almost everywhere.  The exception was HK (-1.3%) which suffered based on concern the FOMC will provide a ‘hawkish’ cut tomorrow and that will be the end of the road.  But China (-0.5%) was also soft despite hopes that when the Politburo meets in the next weeks, they will focus on more domestic stimulus (🤣🤣) just like they have been saying for the past three years.  Australia (-0.5%) slipped as the RBA left rates on hold and sounded more hawkish, indicating there were no cuts in the offing.

European bourses are mixed, although starting to lean lower.  The CAC (-0.6%) is the laggard here although Italy and Spain are also softer while Germany (+0.2%) leads the gainers after a slightly better than expected Trade Balance was reported this morning.  The hiccup here is that the balance improved because imports fell (-1.2%) so much more than exports rose (0.1%).  Hardly the sign of economic strength.

We’ve discussed bonds on a big picture basis, and recall, yields rose yesterday in both the US and Europe.  This morning, though, yields are little changed in the US and in Europe, with sovereign yields, if anything slightly lower.  JGB yields also slipped -1bp last night and the big mover was Australia after the RBA, with yields climbing 5bps.

In the commodity markets, while the trend remains slightly lower in oil (+0.3%), as you can see from the chart below, $60/bbl is home.  As I have written before, absent an invasion of Venezuela or peace in Ukraine, it is hard to see what changes this for now.  I guess if China stops filling up its SPR, demand could shrink and that would accelerate the decline.

Source: tradingeconomics.com

In the metals markets, $4200/oz has become gold’s (+0.3%) home lately while silver (+0.9%) has found comfort between $58/oz and $59/oz.  Neither is seeing much in the way of volatility or new interest, but both trends remain strongly higher. 

Finally, the dollar, which rallied a bit yesterday, is little changed this morning.  USDJPY is interesting as it has traded back above 156 this morning, contradicting all that talk of a Japanese repatriation trade.  Again, it is difficult for me to look at the yen chart below and conclude the dollar has peaked.

Source: tradingeconomics.com

Elsewhere in the space, this is one of those days where 0.2% is a major move.  Historically, December is not a time when FX traders are active.

On the data front, the NFIB report rose to 99.0 this morning, its highest reading in three months and the underlying comments showed a modest increase in optimism with many businesses looking to hire more people but having trouble finding qualified candidates.  This is quite a juxtaposition with the narrative that small businesses are firing workers that I have read in several different places and is backed by things like the recent Challenger Gray survey which indicated that US businesses have fired more than 1.1 million workers so far this year.  This lack of clarity is not going to help the FOMC make decisions, that’s for sure.  As to the rest, the ADP Weekly Survey is due to be released as well as JOLTS Job Openings (7.2M) and Leading Indicators (-0.3%) at 10:00.

The very fact that the biggest story I could find was a hypothetical is indicative of the idea that there is nothing going on.  Look for a quiet one as market participants await Powell and friends tomorrow.

Good luck

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Nothing is Clear

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Though next week the Fed will cut rates
The bond market’s in dire straits
‘Cause nothing is clear
‘Bout growth, and Jay’s fear
Is he’ll miss on both his mandates

 

In the past week, 10-year Treasury yields have risen 13bps, as per the below chart, even though market pricing of a Fed rate cut continues to hover around 88%.  Much to both the Fed’s and the President’s chagrin, it appears the bond market is less concerned with the level of short-term rates than they are of the macroeconomics of deficit spending, and total debt, as well as the potential for future inflation.

Source: tradingeconomics.com

I don’t think it is appropriate to describe the current bond market as being run by the bond vigilantes, at least not in the US (Japan may be another story) but it is unquestionable that there is a growing level of discomfort in the administration.  This morning, we will see the September PCE data (exp 0.3%, 2.8% Y/Y headline; 0.2% 2.9% Y/Y Core) which will do nothing to comfort those FOMC members who quaintly still believe that inflation matters.

It’s funny, while the President consistently touts how great things are in the economy, both he and Secretary Bessent continue to push hard for lower interest rates, which historically had been a sign of a weak economy.

But as I have highlighted before, the data is so disparate, every analyst can find something to support their pet theory.  For instance, on the employment front, the weak ADP reading on Wednesday indicated that small businesses were under pressure, yet the Initial Claims data yesterday printed at a remarkably low 191K, which on the surface indicates strong labor demand.  Arguably, that print was impacted by the Thanksgiving holiday so some states didn’t get their data in on time, and we will likely see revisions next week.  But revisions are not nearly as impactful as initial headlines.  Nonetheless, for those pushing economic strength, yesterday’s Claims number was catnip.

So, which is it?  Is the economy strong or weak?  My amateur observation is that we no longer have an ‘economy’ but rather we have multiple industrial and business sectors, each with its own dynamics and cycles, some of which are related but others which are independent.  And so, similar to the idea that the inflation rate that is reported is an average of subcomponents, each of which can have very different trajectories than the others (as illustrated in the chart below), the economy writ large is exactly the same.  So, an analogy might be that AI is akin to Hospital Services in the below chart while heavy industry is better represented by the TV’s line.

But, when we look at the Atlanta Fed’s GDPNow forecast below, it continues to show a much stronger economic impulse than the pundits expect.

And quite frankly, if 3.8% is the real growth rate, that is quite strong, certainly relative to the last two decades in the US as evidenced by the below chart I created from FRED data.  The orange line represents 4% and you can see that other than the Covid reopening, we haven’t been at that level for quite a while.

What is the reality?  Everybody has their own reality, just like everybody has their own personal inflation rate.  However, markets have been inclined to believe that the future is bright, which given my ongoing view of every nation ‘running it hot’ makes sense, so keep that in mind regardless of your personal situation.

Ok, let’s look at how markets behaved overnight.  Yesterday’s nondescript day in the US was followed by a mixed Asian session with Tokyo (-1.0%) slipping on concerns that the BOJ is going to raise rates.  I’m not sure why that is news suddenly, but there you go.  However, China (+0.8%), HK (+0.6%), Korea (+1.8%), India (+0.5%) and Taiwan (+0.7%) all continued their recent rallies.  The RBI did cut rates by 25bps, as expected, but that doesn’t seem to have been the driver.  Just good vibes for now.

In Europe, screens are also green this morning, albeit not dramatically so.  Frankfurt (+0.6%) leads the way but Paris (+0.3%), Madrid (+0.2%) and London (+0.1%) are all on the right side of the ledger.  Eurozone growth in Q3 was revised up to 0.3% on the quarter, although that translated into an annual rate of 1.4%, lower than Q2, but the positive revision was enough to get the blood flowing.  That and the idea that European defense companies are going to come back into vogue soon.  And as has been their wont, US futures are higher by 0.2% at this hour (7:35).

In the bond market, Treasury yields are higher by 2bps this morning and European sovereign yields are getting dragged along for the ride, up 1bp to 2bps across the board.  JGB yields also continue to climb and show no sign of stopping at any maturity.  A BOJ rate hike of 25bps is not going to be enough to stop the train of spending and borrowing in Japan, so I imagine there is much further to go here.

In the commodity space, silver (+1.8%) has been getting a lot more press than gold lately as there are ongoing stories about big banks, notably JPM, having large short futures positions that were designed to keep a lid on prices there, but the structural shortage of the metal has started to cause delivery questions on the exchanges all around the world.  So, while it has not yet breached $60/oz, my take is that is the direction and beyond.

Source: tradingeconomics.com

Gold’s (+0.4%) story has been told so many times, it is not nearly as interesting now, central bank buying and broader fiat debasement concerns continue to be the key here.  Copper (+1.8%) is also trading at new highs in London and the demand story here knows no bounds, at least not as long as AI and electrification are part of the mix.  As to oil (-0.25%), it is a dull and boring market and will need to see something of note (regime change in Venezuela or peace in Ukraine seem the most likely stories) to wake it up.

Finally, the dollar is still there.  The DXY is trading at 99, below its recent highs but hardly collapsing.  Looking for any outliers today ZAR (+0.4%) is benefitting from the gold rally (platinum rallying too) but otherwise there is nothing of note.  INR (-0.2%) continues to trade around its new big figure of 90.00, but has stopped falling for now, and everything else is dull.

As well as the PCE data, we get September Personal Income (exp 0.3%), Personal Spending (0.3%) and Michigan Sentiment (52.0) with only the Michigan number current.  We are approaching the end of the year and while with this administration, one can never rule out a black swan, my take is positions are being lightened up starting now, and when the December futures contracts mature, we may see very little of interest until the new year.  In the meantime, nothing has changed my big picture view.  For now, absent a very aggressive FOMC cutting rates, the dollar is still the best of a bad bunch.

Good luck and good weekend

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