Tag Archives: #trump

Like Love Unrequited

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Said Trump, we can all use $5K
To help with our life’s day-to-day
So, vote for the R’s
And your cookie jars
Will fill up with this bonus pay

The pundits are clearly united
That this idea’s crazy and blighted
But of more concern
Is buyers will spurn
The 10-year like love unrequited

I guess we cannot be but so surprised that populist President Donald Trump has said he will hand out $5000 to every adult US citizen if the Republicans retain both the House and the Senate during the mid-term elections.  He is, after all, a populist.  And that is what populists do; they promise things to the people to get elected.  While this may be abhorrent to the alleged ‘hard’ money analysts on Wall Street, it strikes me that this is a brilliant way to get those leaning Socialist to vote for the Republicans.  After all, their entire MO is to get money for no work, and that’s exactly what this is.  It is laughable to me that there is now concern that if this were to go forward, it would cost ~$1 trillion and ‘where would the money come from?’ is now the big question.  The money would come from where all the money for government spending comes from, more Treasury issuance.  

Which brings us to a more important question regarding markets, if there is a new line item in the 2027 budget, $5000 bonuses, how will the bond market respond?  Here the situation is very clear, yields continue to rise.  If you look at the chart below comparing 10-year yields with their counterpart TIPS yields, you can see that inflation is edging higher as a concern (nominal yields are rising more quickly than real yields).

Source: tradingeconomics.com

While I don’t believe this is a direct response to the Trump bonus plan, rather to the ongoing climb in oil and related energy prices, I’m confident the bonus plan is not helping the situation.  

This dovetails nicely with the other key topic of discussion in the market; how the Fed will respond to this information as well as the PPI/CPI data to be released later today and tomorrow.  I chuckled at the WSJ headline, A Tiny Shift in the Inflation Rate Could Decide the Fed’s Next Move as the implication is that if the M/M reading for core CPI is 0.2%, the Fed will stand pat but if it is 0.3% it will hike.  And maybe that is the way things will work out.  But if that is the case, it sure seems to me like they would be missing the forest for the trees.  This is especially so since Chairman Warsh was explicit in that he wanted to see the underlying trend, and as we all know, a single data point does not a trend make.

Currently, the Fed funds futures market is back to pricing a 64% probability of a rate hike next week, although as per the below chart from rateprobability.com, you can see that the Fed appears to be one of the most dovish central banks around.

The ECB is virtually guaranteed to hike 25bps this morning and are priced to hike 3 more times during the next 10 months.  I keep wondering how they reconcile a Eurozone economy that is barely growing with hiking rates to reduce demand, and by extension, inflation.  This is where Keynesianism has a really hard time.  In fact, one of the big benefits of Kevin Warsh not having a PhD in economics is that he has never been indoctrinated into that school of thought.

In fact, if you recall Warsh’s first press conference, he lauded the bond market for doing the Fed’s job, raising the cost of funding so the Fed didn’t need to move.  Well, after a lull, the bond market is doing the hard work again.

As an aside, Secretary Bessent’s bond buybacks will take place today and, certainly in no surprise to me, the amount has been increased to $6 billion.  (Remember the ‘at least double’?). In truth, I expect that this program will increase in size each week going forward and ultimately become meaningful with respect to the size of the bond market.  Of course, looking at the bond market’s pricing today, with yields rising another 2bps, the punditry is once again calling out Bessent for not being able to do what he explained.  Funnily, though, they have stopped talking about the yen continuing to decline even though they were quick to dismiss Bessent’s activities there as well.  Personally, I’m going to wait a little longer before I declare the program a success or failure!

Ok, let’s turn to markets this morning.  Oil (+1.7%) continues to climb as the Iran conflict is showing no signs of cooling off.  It is not hard to see the trend in the chart below, and it is not clear what will alter this trend absent a major change in Iran.

Source: tradingeconomics.com

At the same time, the metals markets are under pressure this morning, with copper (-4.75%) leading the way lower and taking gold (-0.3%) and silver (-2.2%) down as well.  I don’t believe anything has changed with respect to the long-term prospects of metals, but they are quite volatile and always have been.  Copper has been subject to tariffs and the LME – COMEX spread and arbitrage is a key part of the price action there, dwarfing fundamentals right now.

But higher energy prices have weighed on risk appetite everywhere with equity markets struggling in most places around the world.  Yesterday’s US weakness was followed by a general decline throughout Asia (China -0.5%, HK -1.3%, Australia -1.0%, Taiwan -0.5%, Indonesia -1.3%) with only Tokyo (+0.2%) bucking the trend.  The only real news came from Down Under where two RBA members were explicitly hawkish, essentially promising a rate hike at the end of this month and the market has priced in two more going forward, a tightening of expectations.

In Europe, though, despite (because of?) the imminent rate action by the ECB today, equity markets are mixed with some gainers (Italy +0.4%, Spain +0.3%) and some laggards, (UK -0.4%) with Germany essentially unchanged.  There has been no data to alter any views, but I guess we will need to hear what Madame Lagarde has to say later this morning.

Quickly, European sovereign yields are little changed this morning but broadly continue to follow Treasury yields higher and JGB yields (+3bps) bounced after their recent dip.  Recall, I mentioned this pattern yesterday.

Finally, the dollar remains generally quiet, although in the last few hours, we have started to see a bit of dollar strength.  JPY (-0.4%) is edging lower as are NOK (-0.7%) despite rising oil prices and ZAR (-0.45%) because of declining metals prices.  However, most other currencies remain +/-0.1% from yesterday’s closing levels.

On the data front, we get a bunch today.

Initial Claims205K
Continuing Claims1780K
PPI0.4% (5.3% Y/Y)
Core PPI0.3% (4.6% Y/Y)
Existing Home Sales3.98M

Source: tradingeconomics.com

We also see the EIA oil inventory data with a slight draw expected.  I suspect that the ECB is likely to be a nonevent and that PPI, unless it is dramatically different than forecasts, will also have a limited impact.  Oil prices are back in the driver’s seat so we will have to see if this rally continues, or it is, like we have seen in both bonds and yen, speculative driven.

Good luck

Adf

Quite Spicey

Posted on by 
Though Friday things looked pretty dicey
With tech stocks then seen as quite pricey
New word that the bombing
Has ended was calming
And stock markets opened quite spicey

Of course, it can be no surprise
That oil’s now well off its highs
The dollar is slipping
Though yields are just dripping
As bond traders still agonize

President Trump changed his mind about continuing the recent bombing campaign against Iran over the weekend amid questions about alleged US munitions supplies.  But whatever the reason, this was music to the risk markets with oil (opening -6.4%) falling sharply while equity futures (NASDAQ opening +1.25%) rebound from last week’s declines.  Once again, headline risk remains the biggest risk there is in markets.  Note the huge gap lower in the oil market early Sunday evening in the chart below from tradingeconomics.com

At this point, it is a fool’s errand to try to estimate where oil prices are heading going forward as the next headline is likely to be the key driver, and that is a complete unknown.

So, let’s turn our attention to some more fundamental questions that have been brewing in the background and are pretty complex.  I want to start with a remarkable Substack piece I read this weekend which had a completely different perspective on the AI investment thesis than anything that I have seen anywhere else.  And it is quite a persuasive piece.  While I have linked it above, it is quite a long read, so the highlights are as follows:

  • The AI boom is not a tech boom; it is a credit driven real estate cycle
  • This is virtually identical to the run-up to the subprime housing crisis and GFC
  • The key to understand is the second derivative of growth, acceleration.
  • GroundBreaker’s (the author) thesis is that the second derivative on AI valuation has already rolled over and the future for AI stocks is pretty bleak, at least in the medium term.

Below are two charts from his Substack to help describe the issue:

This is a basic description of the movements of the underlying (blue line), its velocity (growth rate, yellow line) and its acceleration (the change in its growth rate, red line).  As you can seem growth can still be increasing, but at a slower rate, and that’s the problem he highlights.  

Below is a chart of OpenAI’s valuation metrics (remember it’s private so the values are episodic, not continuous, but the point is if the change in the rate of growth of the valuation metric starts declining, that is the break where things become a problem, i.e. they may not be able to finance their projected growth going forward.  

And as you can see, it is already heading lower.  This does not speak well to the future for OpenAI, and I would argue, the entire space, as many have made the case this is all Ponzi finance, meaning the funding cannot be repaid on cashflows, only on increasing valuations.  

Now consider the subprime crisis where the problems started when the rate of housing price increases rolled over and all those 2-year teaser rates could no longer be financed at higher valuations.  That’s when they all went bust!  Here’s the thing; the 2nd derivative rolled over in late 2006, the first hiccups didn’t happen until mid-2007 with SocGen closing some funds, Lehman didn’t go bust until September 2008 and the equity market didn’t bottom until March 2009.  It can take a long time for this to play out, but beware the cycle, it could well repeat in AI linked investments.

So, there’s that to consider.

The other thing that I’ve been pondering is gold and its meaning within the financial markets.  Unlike the AI discussion above, I want to discuss two very real sides to this story.  On the one hand, the ongoing destruction of the value of fiat currencies by all major central banks’ policies is real.  Money continues to get printed and inflation continues to rise debasing those fiat currencies.  Adding to the problem is the massive government debt issuance which, if history holds, will be sopped up by those very same central banks, adding to the debasement.  The search for a neutral reserve asset to replace US treasuries is real, but the transition will take a very long time, in my view.  However, all this speaks to increased demand for the barbarous relic, and when that is priced in declining fiat currencies, a higher price.  I think it’s a very strong argument and has been made by many, including this poet.  After all, gold is often thought of as the ultimate inflation hedge.

So, what is the flipside?  As I have written frequently regarding oil prices, we cannot ignore the market pricing and what it is telling us.  Understand that I have been a gold bull for a long time and strongly believe in the long-term debasement concern.  But as a long-time trader and market participant, it is very difficult for me to look at the below, long-term chart of gold and not think that there is a much further decline on the cards.  Parabolic moves, historically, do not resolve by trading sideways for extended periods of time, they fall back… a lot!

While we have recently seen several parabolic moves in market prices, notably the NASDAQ and KOSPI, I want to highlight the last time the NASDAQ had a parabolic move, during the tech bubble in 1999-2000.  The chart below is a logarithmic chart of the QQQ ETF.  As you can see back in 2000 – 2002, it fell a very long way after the bubble burst, some 88%, a much larger move than during the GFC!  

There is one other trading market, that while many may dismiss its meaning, I would contend is very representative of the way markets behave across all asset classes, Bitcoin.  The below chart shows it from its beginning, and you can see a number of essentially parabolic moves higher, each resolving with a decline of at least 50% and at times more than 70%.

Source: coinmarketcap.com

My point is that gold shows all the signs of having peaked for a while, and it has ‘only’ fallen some 25% from its highs.  From a trading history perspective, there is nothing that would seem to prevent a move down to $2800/oz or so, a 50% retracement from the high.  

So, which is it?  As I remain long gold in the personal portfolio, I have been a beneficiary of the long climb higher and would love to see it continue.  And there is much to be said for the debasement theory.  But both sides of this argument can be correct with the time frame the key differentiator. We could see a further short-term decline before a renewed upward move of significant magnitude.  Much will depend on how global macroeconomics and economic statecraft plays out over the coming months/years.  And this is why trading is hard!  One last thing describing just how much things have changed regarding gold and sentiment around it, this headline in Bloomberg this morning is remarkable, Gold Climbs as Pause in Mideast Fighting Curbs Inflation Risk.  

Ok, sorry for my rants, but a brief tour of markets show things are exactly as you would expect based on the reduction of tensions in Iran. Equity markets are higher around the world as per the below tradingeconomics.com screen shot, and don’t be fooled by Brazil, it hasn’t opened yet and there are no futures, so that was Friday’s performance.

As to bond yields, they too, are lower across the board as per the below Bloomberg.com screenshot.  Canada, Mexico and Brazil markets are not yet opened, hence the lack of movement.

Oil has fallen further than when I started writing last evening with WTI (-8.2%) and Brent (-9.7%) both sharply lower.  Regarding Brent, apparently there has been a resumption of flows through Kazakhstan which is helping even more there.  Metals are higher (Au +1.1%, Ag +2.2%, Cu +0.9%), which is keeping with the latest theme.  And finally, the dollar is broadly softer, as also would be expected given the movement in other markets.  The two key exceptions here are NOK (-0.7%) which is clearly a reaction to the movement in oil prices and KRW (-0.8%) which actually started the session much stronger but has reversed.  While I read a rationale about concerns over a Fed rate hike, given the movement in oil and yields, that doesn’t seem right.  Rather, after a more than 6% appreciation over the course of the past 3 weeks, it seems more like a reflexive bounce in the dollar.

Source: tradingeconmomics.com

On the data front today, this morning brings Durable Goods (exp 2.5%, 0.8% ex-Transport) but that is all.  I will go deeper tomorrow, and remember, the FOMC meets this week with the current pricing 33% for a hike, even after the decline in oil prices today.  I remain in the no move camp but will discuss tomorrow.

And that’s more than enough.

Good luck

Adf

Iran’s Bases, to Stress

Posted on by 
For nine days and nights the US
Has sought, Iran’s bases, to stress
So, ships through the Strait
Will now have to wait
Until Trump has made more progress

The upshot is prices for crude
Have risen a fifth and are skewed
Right now, to go higher
As three key suppliers
All find their production subdued

Oil (-0.7%) started the overnight session more than 2% higher after nine consecutive days of US military strikes on Iranian ports and missile sites amid more threatening rhetoric on both sides.  It certainly seemed like things were rapidly deteriorating.  Iran struck targets in Jordan as well as Kuwait, Qatar and Bahrain as the conflict escalates.  As such, we cannot be surprised that there has been a steady rise in the price of oil during this period.  Since the increase in fighting, WTI prices have risen about 20%. However, a quick look at the chart below shows that things reversed overnight.  

Source: tradingeconomics.com

The proximate cause for this reversal was commentary from Secretary Rubio that Iran has signaled an interest in resuming negotiations.  Additionally, there is another story about other Gulf intermediaries, although unnamed, who are trying to bring proposals toward the same end.  Now, the one thing I know is that both sides in this conflict (and any conflict really) put out reams of propaganda, especially about the conflict.  With that in mind, we have no way of knowing whether negotiations are going to restart or not.  However, it appears market participants are willing to believe that is the case.  

What does this mean for markets?  If we have learned nothing else throughout this conflict, it is that many old relationships are no longer operating the way they had in the past.  Consider gold for a moment.  Prior to this conflict it was considered the ultimate safe haven, the thing you wanted to own if things got really bad and there was an escalating war.  And yet, here we are with gold having fallen some 25% since the US first bombed Iran as you can see below.

Source: tradingeconomics.com

Now, two things about this are that first, that followed a remarkable rally for the previous twelve months, so a correction wasn’t crazy and second, it seems that one of the key drivers in the price decline was selling of gold by sovereigns that needed the money including Russia and Turkey.  After all, that is why those reserves exist, for a rainy day, and it was certainly raining hard.  Nonetheless, that narrative theme, owning gold in case of war, has not played out at all as expected.  

Or we can look at the equity markets, especially tech stocks.  It is hard to look at the chart of the NASDAQ below and conclude that the Iran conflict was anything but beneficial for them.  This, too, runs counter to the general narrative prior to the war that risk assets would suffer during a war.

Source: tradingeconomics.com

Now, if we widen our lens a bit to include other nations’ equity markets, Korea in this case, the story is not so sanguine.  As you can see from the below chart of the KOSPI, it has fallen 29% since it peaked about one month ago.

Source: Bloomberg.com

But is that war related?  Or is that the air coming out of what appears to have been a massive bubble in semiconductor stocks.  Recall, about 40% of the value of the KOSPI is made up of just two companies, SK Hynix and Samsung, and both have mooned because they build semiconductors that are in huge demand due to the AI race around the world.  

Now, one of the few truisms in markets is that every shortage is followed by a glut as the high prices from the shortage lead to massive overinvestment in whatever is lacking.  So, consider this comment from someone I believe is quite reliable.

There will be a comeuppance in tech sector shares, I believe, although I would not dare to guess when.  Semiconductors are historically a cyclical industry, and I don’t think anything has changed about that, except perhaps the amplitude of this cycle.  But there will be a downwave and likely one that wipes out many of the gains seen.

And how has the escalation/de-escalation played out elsewhere?  Well, Chinese shares rallied (+1.5%, HK +2.3%) although that was because the Chinese plunge protection team was in the market buying shares, and they told us so.  Tokyo was closed for Marine Day and otherwise, Friday’s weak US performance was followed by general declines, although far less than Korea’s -4.5%.  As to Europe, there is very little ongoing this morning with virtually no data, no commentary and limited market movement.  Arguably, the only story of note was the official resignation of Kier Starmer as PM and the installation of Andy Burnham, although that has resulted in the FTSE 100 selling off -0.5%, the laggard in Europe.  And given his history, including a lack of experience and stated preferences for far-left policies, I think there could be more to come there.  As to US futures, at this hour (7:30) they are slightly higher across the board, +0.3% or so.

Treasury yields have edged higher by 2bps, and European sovereign yields are higher by 1bp across the board with only UK gilts (+3bps) doing worse.  But it remains difficult to look at 10-year yields and get overly excited about anything.  I grant that there has been some choppiness, but in the big scheme of things, a 20bp range on a 4.5% handle over the course of the past month is not all that shocking, especially given the backdrop of a war and extremely volatile oil prices.

Source: tradingeconomics.com

With oil retreating, the three major metals, gold (+0.4%), silver (+2.4%) and copper (+1.2%) are all firmer this morning.  That relationship has been quite consistent, I will admit.

Finally, the dollar remains uninteresting overall with the DXY little changed although there have been two stories of note.  First, KRW (+0.6%) has rallied more than 5% over the past several weeks as the BOK works to change its status from a restricted currency to one that is freely convertible.  They have just announced plans for that to become the reality starting in January 2027 and I expect that it will help the won going forward.

Source: tradingeconomics.com

While the downside of convertibility is a potential increase in volatility, one need only look at the chart above to see it was already reasonably volatile.  But the positive is that KRW can become a viable asset for international utilization, opening up investment to a much wider community and that is inherently strengthening.

The other story is INR (0.0%) which while little changed this morning, saw another bout of central bank intervention on Friday as you can see on the chart below (the long green spike downward on the second candle from the right).

Source: tradingeconomics.com

Alas, the 1.4% gain was very short-lived and merely wasted some more of the RBI’s reserves.  The rupee is likely to remain under pressure until the Iran conflict ends as higher oil prices are a severe impediment to the Indian economy.  I cannot help but think that we are going to test 100.00 at some point before the end of 2026, although I also imagine we will see some more substantial changes from India going forward to help mitigate the impact.  But other currencies are doing little overall.

On the data front, it is an extremely quiet week with the ECB meeting (no change expected) arguably the highlight on Thursday.

TodayLeading Indicators-0.1%
ThursdayECB Rate Decision2.25% (unchanged)
 Chicago Fed Index0.14
 Initial Claims212K
 Continuing Claims1809K
FridayNew Home Sales610K
 Flash PMI Manufacturing54.5
 Flash PMI Services51.5

Source: tradingeconomics.com

As we are in the quiet period, there will be no Fedspeak until, at least, the FOMC meeting next week.  So, the war remains the story to watch, and who knows how that will go this week.

Good luck

Adf

Risk-Taking Cracks

Posted on by 
The president told us elections
Were filled with some lethal infections
He’s unclassified
More docs to help guide
The courts to start making corrections

Meanwhile in Iran more attacks
Has led to some risk-taking cracks
Thus, oil is higher
While semis look dire
Have we seen the market climax?

A few words on the president’s speech last night as it was widely touted.  In it, he explained he declassified a trove of documents offering proof that there have been many election irregularities over the past six years, naming China as a major player in the process.  These documents are available online for all to see and ostensibly refute (I have not read them, nor am I likely to do so) that our elections have been secure in the US.  In fact, the same government analysts that have declared there to have been no issues are the ones who these documents purport to show were interfering.  My only observation, especially on this topic, is that no matter the proof available, minds have long been made up, and this will not change opinions, at least until arrests are made and trials are held.

Which takes us to more relevant market issues.  Arguably, the poster child for semiconductor stocks is the Korean KOSPI (-6.4%), where just two companies, both major players, Samsung and SK Hynix, represent some 40% of the index value.  As you can see from the below chart, it has been tough sledding for the past month, with that market closing lower by nearly 28% from its highs on June 22nd.

Source: barchart.com

And while that may be extreme, if we look across major markets in Asia, there was some rough times last night almost everywhere.  Tokyo (-4.0%), HK (-1.8%), China (-3.6%) and Taiwan (-6.5%) all had serious dislocations downward.  And, of course, the thread running through them all is the tech exposure.  There has been much discussion of a rotation out of tech and AI stocks into other areas, with financials and energy amongst the beneficiaries, and certainly, last night’s price action supports that thesis.  Interestingly, India (+1.25%) completely bucked that trend, but then, India is perceived to be a major loser from the AI story, so if that is unwinding, I guess it’s no surprise that India benefits.  Elsewhere in the region, things were far less volatile.

As to Europe, despite a glaring dearth of technology companies, equity markets there are also under pressure this morning (DAX -0.9%, CAC -0.9%, IBEX -0.5%, FTSE 100 -0.1%) although that is more likely to be a response to the fact that oil prices have picked back up as the US resumes more aggressive military activities against Iran.  As to US futures, at this hour (6:45), they are all lower led by the NASDAQ (-1.8%) although both the SPX and DJIA are down by -0.7%.

Which takes us to oil.  The black, sticky stuff is higher by 2.0% this morning, although, as you can see from the chart below, it is still hovering right around $80/bbl, the level I described as its new home earlier in the week.  

Source: tradingeconomics.com

The key question here remains just how much of an interruption in economic activity has been caused by the Iran conflict.  Not dissimilar to the election question at the top, it seems the two sides of this argument are dug in and will countenance no discussion that they are misreading the situation.  There are still analysts who discuss tank bottoms and the idea that now that so many reserve inventories have been released, we are quickly approaching a situation where their much mooted $200/bbl is right around the corner.  And yet, despite the tick higher overnight, the market continues to price a relative lack of concern over future supplies.  As always, I go with prices as the best arbiter, but that’s just me.  The massive production increases from the US and Canada, as well as Brazil and Guyana, increases from Venezuela and the workarounds by the Gulf nations to get their oil to market continue to demonstrate that supply is available.  

One wild card that is very difficult to completely understand is China, where things are always opaque, and where their imports have fallen sharply, thus reducing demand.  Was that demand “destroyed” in the sense that it will never return?  Seems unlikely.  Rather, my best guess, and it is just a guess, is that China tapped into their own SPR and has been using that, rather than importing.  Whatever the situation, there appears to be no shortage of oil available.  

One other thing weighing on the price has been Ukraine’s success in attacking Russian refining capacity.  If the Russians cannot refine their oil, they need to sell it as crude rather than products, and that is adding to the inventories available for sale.  It is also part of the explanation as to why products prices and the crack spread remain so high, more oil, less refining.

Looking at precious metals, gold (+0.4%) closed below $4000/oz yesterday for the first time since last November as per the below chart.

Source: tradingeconomics.com

Silver (-0.4%) also remains under pressure and this morning copper (-1.9%) is suffering alongside the precious space.  But perhaps a few words on what gold really represents are in order.

As J.P. Morgan said in 1912, before the Federal Reserve was created, “Gold is money, everything else is credit.” Certainly, the second part of the statement is correct as your bank deposits rely on your bank standing behind them, making you a creditor of your bank.  Federal Reserve Notes are paper obligations of the US government, so again, represent purchasing power, but as we have learned, a decreasing amount of it every day.  Meanwhile, gold has a 5000-year history of being accepted as a thing of inherent value.  Now, the widely accepted definition of money these days is it must have three characteristics; it serves as a medium of exchange, a store of value and a unit of account.  Gold historically has served as the first two, although rarely as a unit of account.  Rather, gold holdings were always converted into whatever the unit of account was at the time.

Which takes us to the present, why does gold continue to represent a part of the financial markets, and over the past several years, an increasingly important part.  I would contend this is all of a piece with the broader changes in the global community, notably the end of the Pax Americana, where the US no longer chooses to (or can) guarantee the peace of the post WWII and Cold War worlds.  Instead, we have seen a constant increase in debt by every nation as governments around the world seek to placate their own citizens and are unable to pay for all the goodies they offer, thus borrow the difference.  

However, the freezing of Russian reserve assets by the West in the wake of the invasion of Ukraine has altered many views about what is safe and represents value, and what is paper and doesn’t represent value and central bankers, charged with maintaining a nation’s wealth, have gone back to gold as the one thing they know will retain value given it is nobody’s liability.  The chart below shows activity in May, which is similar to what has been happening virtually every month, that central banks are relatively price insensitive, buying the stuff as a strategic asset.  And the sellers, were selling because they needed the money!

One last chart to make the point about gold and purchasing power.  The below chart from the FRED database demonstrates just how much purchasing power the dollar has lost since the Fed came into existence; i.e. just how much inflation has destroyed the real value of the dollar.  For reference, that opening level is 1021 compared to today’s 29.9, a 97.1% devaluation in 113 years of the Fed.  It can be argued that the Fed has failed catastrophically in their effort to maintain the value of the dollar.

Ok, quickly elsewhere bond yields have edged lower, with Treasuries (-3bps) leading the way and European sovereigns either unchanged or having slipped by -1bp.  JGBs overnight also slid -2bps, but overall, while there is a lot of discussion about yields, they are not moving very far.

Finally, the dollar is a bit firmer this morning with the pound (-0.3%), Aussie (-0.4%) and euro (-0.1%) all slipping although NOK (+0.2%) is benefitting from oil’s move.  In the EMG bloc, though, there is more trouble with KRW (-0.5%), ZAR (-0.6%) and MXN (-0.3%) representative of more anxiety there.  Ultimately, I still have a hard time getting too bearish the dollar in the current world.

On the data front this morning brings Housing Starts (exp 1.31M) and Building Permits (1.40M) as well as IP (0.2%) and Capacity utilization (76.2%).  Finally, at 10:00 we see Michigan Sentiment (51.0).  There are no Fed speakers scheduled, and they are entering their quiet period, so we won’t hear from them until the meeting on the 29th.  (Perhaps we won’t hear from them anymore after that too!). 

Summing up, Iran and oil are still key drivers, equity market rotation is happening, although given how far it has moved, we may be near the end of that process, and yields have no direction.  Regarding yields, we may have reached the point where the issue is not inflation concerns, per se, but rather the sheer volume of debt that is going to be issued going forward, and the fact that private investors want more yield to be persuaded to buy it.  As to the dollar?  Like I said, I just don’t see the bear case over any longer-term horizon.

Good luck and good weekend

Adf

Many Critiques

Posted on by 
This evening the president speaks
And pundits have many critiques
Meanwhile in Iran
There’s no clear game plan
As havoc, the president wreaks

But right now, seems traders don’t care
‘Bout Persia or any warfare
Instead, soft inflation
Has changed the narration
So, pundits, high rates now foreswear

Some days, it’s simply more difficult to find stories that bring coherence to the narrative.  But let me try.  Yesterday’s PPI data was also much cooler than forecast, although still clearly quite high on a year over year basis, but it certainly added to Tuesday’s CPI result and has changed a lot of views regarding the Fed’s future actions.  For instance, if we look at my favorite CME table for current probabilities of future rate moves, we see that there is now just a 10% probability of a hike in two weeks’ time, and just one hike priced in for the next 18 months.

Remember, Monday, there was a 40% probability of a hike priced for the July meeting and two+ hikes priced through 2027.  (As I recall, I was an advocate of fading that price action.)  I expect that this will alter the narrative as calls for an immediate rate hike to burnish Warsh’s, and the Fed’s, credibility are likely to fade away.  In the meantime, he didn’t say anything new at the Senate testimony and the rest of the Fed talking heads continue to reiterate that they would be comfortable raising rates if inflation pressures rise.  Remarkably, they didn’t seem to notice the recent numbers.

Turning to the Strait of Hormuz, the US blockade of Iranian vessels is back in force and there have been a significant number of new US attacks on Iranian military sites.  As well, the IRGC has fired drones/missiles at several tankers trying to exit the Strait on the Omani side.  I read this morning that the president is considering whether to escalate things by attacking Kharg or Qeshm Islands, two key Iranian strongholds, and my guess is if that were to be the case, the oil market would likely take a turn higher.  But right now, WTI is effectively unchanged on the day, and has been since Monday’s rise.  I guess $80/bbl +/- is the new home.

Source: tradingeconomics.com

As to the President’s speech tonight, the word is it is going to involve election related issues, seemingly regarding the integrity of elections, the SAVE Act and the results of the 2020 elections.  Recall, Tulsi Gabbard, before she resigned to care for her husband, declassified a great deal of information and some portion apparently was election related.  Alas, this will simply further stoke partisan feelings as there is very little evidence that showing proof of something political has the ability to change the opposing viewpoints of partisans.

So, away from oil, we are now into earnings season, and the big banks all had monster quarters while there is growing angst over the AI sector and whether the main players will be able to make the money that was assumed for so long.  So, while yesterday saw US indices trade higher, the overnight session has been far less positive.

Starting in Asia, Tokyo (-2.8%), China (-1.9%) and Korea (-6.4%) all felt the pain of semiconductor weakness although HK (+1.3%) bucked the trend with most of the rest of the region showing far less movement in either direction.  There was precious little data to drive things, so this clearly seemed to be tech sector woes.  In Europe, broad, but modest, weakness is today’s theme with both France and Germany lower by -0.65% with Spain (-0.5%) also under pressure and the UK (-0.3%) the best of the bunch after GDP data was mildly better than the last reading at 1.3% Y/Y in May.  While the Trade Balance improved a bit, IP was weak and although it has been spun as a positive report, it hardly quickens the pulse.  Meanwhile, at 7:20 this morning, NASDAQ futures are lower by -1.1% although the other two major indices are little changed.  Tech is definitely under pressure here.

In the bond market, this morning we are seeing yields higher by basically 2bps across the board in Treasuries and European sovereigns.  Much is being made of the French OAT 30-year yield this morning as it trades to its highest level since the GFC as per the below from barchart.com.

While this headline of the highest rate in X years is splashy, what we have been seeing consistently, across all nations, is that debt issuance continues to rise and central banks have not been absorbing nearly as much as they had in the more recent past.  This means that the private sector needs to buy bonds, and they are demanding higher yields.  Someone made the point (and I cannot remember where I first read it, but it is valid) that bond yields appear to be less about inflation concerns, per se, and more about the ability for markets to absorb the ever-increasing amount of debt being issued by governments…and companies.  Just look at how much debt is being issued by the hyperscalers to fund their AI buildout.  Regardless of what happens to the front end of the curve and central bank rate activities, it does feel like the back end of the curve is where the signal is going to be found going forward.

Precious metals continue to bat about, rallying and then giving those gains back, but net remain under pressure as gold (-0.75%) and silver (-1.9%) are both softer this morning although copper (+0.7%) continues to find support.  It is difficult to look at the gold chart and be optimistic about a reversal of fortune in the near-term.  

Source: tradingeconomics.com

However, as per the discussion above regarding the increasing issuance of government debt around the world, at some point, the larger fiat vs. physical stores of value question is going to reassert itself and gold will be one of the main beneficiaries of that story.  Alas, it has a history of doing nothing from a price perspective for years on end.

Finally, the dollar, which suffered yesterday, with the DXY slipping -0.5%, is not very interesting this morning.  the pound, interestingly, has slipped -0.3% despite what many are trying to spin as a positive GDP report.  The other noteworthy mover is KRW (+0.4%) on the back of the BOK raising interest rates by 25bps to 2.75% last night.  While this was widely expected, the rhetoric about faster growth driving the need for higher rates has been a boon to the won.  (And remember, this was despite the KOSPI getting crushed last night on weakness in the two big semiconductor firms.)

On the data front, this morning brings the weekly Initial (exp 217K) and Continuing (1820K) Claims as well as Retail Sales (0.2%, -0.1% ex autos) and the Philly Fed (13.0).  With the recent surprises in CPI and PPI, I’m sure there will be a lot of focus on this morning’s Retail Sales data.  Certainly, a weak number will feed into the new, growing narrative, that the economy is slowing and rate hikes are slipping from view.  But yesterday’s Empire Mfg number was quite strong. There are still many inconsistencies in the data, which if nothing else, allows every analyst to point to something and claim they are right.

Ultimately, to me the great concern is an escalation of US activity in Iran, especially bringing troops into play.  In that case, I think things would change a lot, and we could well see another jump in oil prices.  But absent that, right now there is a lot of noise, but not much signal.  I don’t think the big picture has changed, i.e. investment into the US remains strong and that is going to support both the economy and the dollar.  But there will be many twists and turns.

Good luck

Adf

Theses All Wrecked

Posted on by 
There once was a fire that ceased
Which many hoped would lead to peace
But recent attacks
On ships did climax
In poking the milit’ry beast

The market’s response was direct
With oil bears’ theses all wrecked
The dollar, it rose
While risk takers chose
Their stocks and bonds, now, to reject

While we had all become accustomed to the gradual decline in the price of oil as it appeared there was a solid chance that an agreement would be reached between Iran and the US, that all came a cropper yesterday after Iran attacked 3 different ships exiting the Strait and the US responded with attacks on more than 80 targets, including (according to the WSJ) “air-defense systems, command and control networks, antiship missile sites and more than 60 Iranian small boats near the waterway.”  This was a significant uptick in the nature of the response from previous skirmishes and according to President Trump, the ceasefire is over.

“To me, I think it’s over, I don’t want to deal with them anymore,” Trump told reporters at a NATO summit in Ankara on Wednesday. “They’re liars, they’re cheats, they’re sick people.” 

Given the sudden change in the status in the Gulf, we cannot be surprised by the market response.  WTI (+6.0%) rocketed higher as you can see in the chart below.

Source: tradingeconomics.com

And while that is clearly a significant move, and has changed attitudes in the market, I think it is worth stepping back slightly and looking at the price action over the past month, just to remind ourselves that though things may be changing, we have still seen a dramatic decline in price.

Source: tradingeconomics.com

Here’s the thing, right now there is no way to know if we are going back to the situation in early March, where there was substantial fighting, or at least bombing and missile attacks, each day, or if this, too, is going to pass like the previous minor skirmishes.  Certainly, President Trump appears tired of the current situation, but it is not clear what type of further response is in the offing.

In the meantime, given the new military action and the limited prognosis for a quick return to the previous status of ships moving through the Strait, it can be no surprise that investors decided to dump a lot of risk.  So, let’s take a look at how things behaved overnight.

You will not be surprised that equity markets are broadly lower this morning.  Yesterday’s US session was soft on concerns over the tech sector and that was before the resumption of hostilities in Iran.  So, Tokyo (-2.1%), China (-0.8%), Korea (-5.4%) and India (-2.2%) all fell sharply amongst major markets in Asia with most of the smaller exchanges under pressure as well.  The outliers here were HK (+3.0%) and Taiwan (+0.6%) as both saw continued demand for semiconductor and tech shares.  It feels to me that these two markets will have difficulty maintaining this positivity under the current circumstances.

In Europe, it is a bloodbath with all major bourses lower led by Germany (-2.4%) and Spain (-2.7%) while France (-2.2% and the UK (-1.6%) are not far behind.  The NATO meeting ongoing in Ankara is not helping anybody’s views as President Trump continues to add pressure to NATO to pay their own way.  Ultimately, the NATO transition continues, and it is anybody’s guess as to how involved the US will be going forward.  As to US futures, at this hour (6:35) all the major markets are lower by -1.0% or more.

In the bond market, yesterday saw Treasury yields rise 6bps during the session as yields tracked the oil move pretty closely.

Source: tradingeconomics.com

This morning, Treasury yields are higher by 2bps more but that is nothing compared to the European sovereign markets, which as you can see from the below Bloomberg.com screenshot are substantially higher this morning.

All those visions of inflation finally starting to decline were abruptly altered after the renewed activities in the Gulf.  Adding to the pressure on bonds is the concern over the increased spending promises from governments around the world which has seen traders increase short positions in the bond market to near record levels.

We cannot be surprised that gold (-1.2%), silver (-2.2%) and copper (-2.2%) are lower in response to the renewed fighting and rise in oil prices as that relationship has been very consistent.  We also cannot be surprised that the dollar is a bit firmer this morning, although not universally so.  For instance, JPY (-0.2%) is now pushing back to its recent lows (dollar highs) although the pace of movement remains quite modest.  As well ZAR (-0.6%) is also under pressure amid the decline in gold prices and rising oil prices (they are an importer of oil).  On the flip side, though, NOK (+0.4%) is benefitting from oil’s rally as is CAD (+0.25%) while KRW (+0.6%) seems to be benefitting from money flowing home after the recent equity rout there (covering margin calls?).  NZD (+0.4%) strengthened on the back of the RBNZ raising their base rate by 25bps as they continue to have some concern over inflation, but that only takes it back to 2.50%, hardly tight money.  As to the other main currencies, they have not really done that much, although lean slightly lower this morning.

On the data front, we see the EIA oil inventory data with draws still expected, as well as a 10-year Treasury auction, where it will be quite interesting to see if investors are keen on the extra yield now available.  And we get the FOMC Minutes, which despite the Iran situation, will still be keenly watched and read as the analyst community tries to get a better understanding of the way the Fed will be behaving going forward.  What is the new reaction function?  

Looking at the Fed funds futures market, pricing for that first rate hike has moved to September from the previous October timeframe, and a second hike is back in the cards as well.

However, nothing has changed my view about the way things will evolve.  Certainly, the increased hostilities are a negative for markets, but I suspect that this will be a short-lived episode and things will calm down again sooner rather than later.  With that in mind, I have not changed my view about no rate hikes this year with a potential cut.  However, if this fighting does increase and the oil price creeps higher over the next weeks and months, I will be rethinking this stance.

Right now, we are back to being hostage to events on the other side of the world.  All we can do is watch and respond.  

Good luck

Adf

‘Pocalypse Dreams

Posted on by 
Though many have preached the buck’s dead
The greenback keeps moving ahead
And right now, it seems
Their ‘pocalypse dreams
Are still all confined to their head(s)

But narrative writers ignore
Whatever they said from before
Right now, it’s the buck
That’s causing bad luck
As rate hike bets all start to soar

In a fairly rare set of circumstances, the dollar has drawn the spotlight in markets for the past few sessions.  While it always matters to some extent, it is rarely seen as the cause of many other market movements, just a coincident one.  But right now, I read more about how the strong dollar is driving equity weakness and commodity weakness as more and more bets get placed on the Fed hiking rates aggressively to address inflation by the end of the year.

Using the DXY as proxy, the first chart is the one everybody wants you to focus on, showing the last year and how we have had a clear break above the trading range top of 100.50 and now people are creating targets for just how high it can go.

Source: tradingeconomics.com

And it certainly can go higher, as a quick step back to get some more perspective shows where the dollar has been during the past 5 years. It seems to me I could create a narrative that the dollar has been massively undervalued over the past 18 months, and this move is simply returning it closer to its longer-term fair value.  In fact, just eyeballing, it seems quite reasonable to think the 5yr average of the DXY is somewhere around 103-104 (subsequently confirmed with Grok), still a few percent higher than current levels.  Reversion to the mean anyone?

Source: tradingeconomics.com

All of this, though, begs the question, are rate hikes really on the near-term horizon?  I remain firmly in the camp that is not the case.  Fortunately, someone on my side is super smart, Bob Elliott, former hedge fund manager at Bridgewater.

On the rate hike front, the below CME probability table has barely changed from yesterday as the narrative is strong that rate hikes are coming.  

I cannot really understand why this is suddenly the belief set given the fact that the key driver of recent higher inflation data has been the price of oil, and that price continues to fall, down a further -2.0% this morning.  I understand that gasoline prices have not fallen quite as dramatically, but nothing about the chemistry has changed and I remain highly confident that those prices will be falling as well, catching down to oil.

Source: tradingeconomics.com

So, I remain confused as to why everybody seems to believe the Fed, which despite a new Chair remains the same institution that observed inflation run higher for years during Covid and calling it transitory, has become the reincarnation of the Bundesbank.  In fact, the only rationale I see is that other than Waller, Warsh and Bowman, who were all appointed by Trump, everybody else in that room has TDS and is terrified that things will work out such that by the time the election rolls around, the economy is ticking over nicely with inflation a historical issue.  And frankly, I think most of them do share that affliction.

But other than Powell, and Cook to some extent, none of them have really felt the force of the critiques that come with upsetting President Trump, and frankly he didn’t care about Cook per se, she was just a convenient target to get ousted so he could put his man in there.  And in fairness, Cook is a massive dove, and should agree with Trump on this policy, but I’m sure she doesn’t because…Trump.  I am confident none of them signed up for being in that spotlight.

Apparently, BOA is calling for 3 rate hikes this year in the final four meetings.  I think that’s nuts, but futures are pricing a 2/3 chance of a hike at the end of July, which I also think is nuts.

The recent hiccup in stocks, and the steadier downturn in commodities has been blamed on dollar strength which is being driven by expectations of rate hikes coming soon.  While I like the dollar in the long-term, that is because I believe investment flows into the US will drive it, not financial arbitrage flows.  As things evolve, I expect the market to understand the Fed will not be hiking rates and narratives will need to find a new bogeyman.

Ok, let’s tour markets quickly.  Yesterday’s equity market selloff in the US, following the tech selloff in Asia closed well off the lows and futures this morning are pointing slightly higher.  Asia was mixed overnight with Korea (+3.3%) rebounding sharply although there was weakness in Japan (-0.9%), Taiwan (-2.25%), Indonesia (-3.6%) and the Philippines (-2.2%).  But on the flip side, China (+0.5%), HK (+0.3%) and India (+1.0%) all followed Korea while other regional exchanges had much more limited movement.  It appears that people are trying to figure out what to do for now.

In Europe, Germany (-1.0%) is the laggard after Germany cancelled its plans for a new warship and Rheinmetall, the company set to win biggest there, got crushed.  But elsewhere +/-0.3% or less is the norm with little new information as traders await the next shoe to drop.

In the bond market, interest is low as 10-year Treasury yields continue to track around the 4.5% level and movement has been 1bp or so lower across all of Europe.  Nothing to see here for now.  Just wait until views start to change on rate hikes though!

Metals markets continue to get hammered with gold (-1.7%), silver (-2.9%) and copper (-1.6%) all still falling as the opening narrative about higher rates and a stronger dollar play out.  The thing is, I think the fundamentals remain positive for metals markets as there continues to be central bank demand for gold as well as industrial interest in silver and copper and long-term shortages of supply.  But right now, none of that matters.

Finally, looking beyond the DXY, it is no surprise the euro (-0.35%) and pound (-0.35%) are lower given the DXY’s continued rise, but the yen (-0.1% and at a new low (dollar high) for the move) continues to slide and there is weakness pretty much across the board in both the G10 and EMG blocs.  KRW (-1.0%) is today’s laggard while INR (+0.2%) is the lone currency holding its own.  This continues to be a dollar focused story so when the rates story changes, so will the dollar.

On the data front, we see New Home Sales (exp 640K) and then EIA Oil inventories with yet another large draw expected.  And that’s it for today.  As long as this rate hike narrative remains primary, look for weaker risk appetite and a strong dollar.  But I think it is a short-term phenomenon.

Good luck

Adf

What’s Next To Be Feared?

Posted on by 
For Holmes, when the dog didn’t bark
He recognized that was the spark
To solving the case
And so, we must brace
For narrative changes quite stark

This morning, no headline appeared
Regarding Iran, which is weird
Have markets moved past
This problem, at last?
And if so, what’s next to be feared?

So, perusing the WSJ on-line this morning, the notable absence was any story on Iran and the current situation regarding the ongoing peace talks.  There was a throwaway article about Trump and what he has said about Iran, but nothing of substance.  Part of me is amazed that this is the case as the conflict would still seem to be the most important issue in the markets given the impact on oil prices and inflation, as well as its general geopolitical impact.  But part of me cannot be surprised at all.  It’s not just traders who have the attention span of a fruit fly, apparently so does the general public.

I made the point several weeks ago that this conflict would fade into history quickly when it was ending based on the fact that the Venezuela incursion, back in January, fell from headlines within about three days.  Given the generic MO for most publications of, if it bleeds, it leads, the fact that bombs are no longer falling, and peace talks are ongoing is no longer that interesting.  Add to that the generic TDS of most of the media, where they loved to play up rising oil prices as a major policy failure for Trump, now that those prices have been falling for the past 11 weeks and have slipped >30% in that period, and quite frankly, have further to fall, most editors have moved on.  If they cannot tar Trump with a policy failure, they would rather not discuss the subject at all.

Source: tradingeconomics.com

So, here we are this morning with the market now turning its focus to an ostensibly hawkish Fed despite the recent analysis by the BLS indicating that more than 60% of the recent uptick in inflation was driven by the rise in energy costs.  So, with energy costs reversing course dramatically, what does that say about their impact on inflation and exactly how hawkish does the Fed need to be in that case.

Right now, equity markets are under some pressure as some of the euphoria associated with the rising tech sector’s stock prices and the ongoing AI mania, is wearing a little thin.  And let’s face it, things certainly seemed a bit bubblicious.  But the combination of ongoing fiscal support from the OBBB and tax cuts and declining energy prices is likely to help support things going forward.  No matter the timeline you observe, we have seen a remarkable rally in tech stocks, as evidenced by the NASDAQ’s chart below.  A correction to the 50-day moving average would hardly be surprising, nor would it be damaging to the overall market structure, I think, although it would almost certainly result in ‘end of days’ headlines!

Source: tradingeconomics.com

So, while futures this morning are lower across the board (NASDAQ -2.9%, SPX -1.4%, DJIA -0.6%) as of 6:40am, and we could easily see some weakness for a few more days/weeks as positions shake out, I am not in the camp of things are about to collapse.

Speaking of equity markets, the overnight session was filled with red ink led by the KOSPI (-10.0%) in South Korea, although there was weakness pretty much everywhere (Nikkei -3.6%, CSI 300 -2.8%, Hang Seng -1.8%) with India and Taiwan also slipping more than -1.0% although Australia, NZ and Singapore had more muted declines.  Tech was clearly under pressure.  Of course, we cannot be surprised that European shares are also lower in a generally weak risk scenario, but given the lack of tech companies headquartered there, the declines have been far less significant (DAX -1.0%, CAC -0.6%, IBEX -0.2%, FTSE 100 -0.2%) although the Netherlands (-1.3%) home to ASML, the only tech name of note on the continent, is underperforming as well.

Meanwhile, the bond market has peeked at the oil market and decided, perhaps inflation is not a chronic condition, or at least not as bad as previously feared.  Yields are lower across the board with Treasuries (-3bps) leading the way while European sovereigns are all lower by between -3bps and -4bps.  Overnight, though, JGB yields could make no headway lower as the yen continues to be under enormous pressure.

Speaking of the yen, it continues to slowly weaken despite prominent statements by Japanese FinMin Katayama about her discussions with Treasury Secretary Bessent and their agreement to have the US coordinate with Japan in the event it is decided something needs to be done in the markets.  But so far, no signs of actual intervention.  A look at the chart below shows a very slow and steady climb in the dollar, and frankly, I do not see what will change this trajectory.

Source: tradingeconomics.com

While interest rates aren’t the only driver, they still have a key impact, and they are the one thing that can be changed quickly.  In fact, the best hope for the yen, in my view, is the fact that at some point soon, the market is going to understand the Fed is not about to raise rates again, and the next move will likely be lower, albeit not until later in the year.  but that change in tone will change a lot of opinions on how the yen should behave, and a move back toward 155 amid modest overall dollar weakness could easily be seen.  But right now, everybody is of the opinion that the FOMC is going to hike this year, and Japan cannot afford to be aggressive in that context, hence the yen’s weakness.

Here is a forecast I do not make lightly, Fed funds will finish the year lower than they are now, probably 3.25%-3.50%.  And the current Fed funds futures market has bottomed (rates peaked) as per the CME table below.

As to the rest of the FX world, the dollar reigns supreme this morning as the euro (-0.3%) is below 1.1400 this morning, its weakest in more than a year as the Flash PMI data did it no favors, but the new hawkish Fed, higher US rates strong dollar narrative has been the driver.  We have seen the same type of movement elsewhere, except where the dollar has moved further, with AUD (-0.8%) the worst performer in the G10 although HUF (-1.0%) is actually the biggest laggard.  However, given the overall decline in commodity prices, those currencies that benefit from rising commodities are also under pressure (NOK (-0.7%, ZAR -0.5%, SEK -0.8%, MXN -0.7%) and we already discussed AUD.

Lastly, the metals markets are also under serious pressure with gold (-1.6%), silver (-4.5%) and copper (-3.3%) all tumbling on the same new view of higher rates and a stronger dollar.  The thing about the commodities story is the fundamentals still seem positive to my eyes, and this seems like the last of the fluff getting taken out.

On the data front, Thursday’s PCE data is the big day and here’s what we have overall:

TodayFlash Manufacturing PMI54.8
 Flash Services PMI51.0
WednesdayNew Home Sales640K
ThursdayInitial Claims225K
 Continuing Claims1800K
 Q1 GDP Final1.6%
 Personal Income0.4%
 Personal Spending0.6%
 PCE0.5% (4.0% Y/Y)
 Core PCE0.3% (3.4% Y/Y)
 Durable Goods-4.3%
 -ex Transport0.7%
FridayMichigan Sentiment50.3

Source: tradingeconomics.com

In addition to the data, we start to hear from some of the FOMC members, although I am confident Chairman Warsh won’t be out and about.  Some analysts claim that Warsh’s view of less communication is going to weaken him as others will get to make their point and he won’t be able to counter it.  But I think that Warsh has a plan, and if we continue to see oil prices decline, which seems the likely outcome, then all the inflation fears are going to dissipate and by the time the next meeting rolls around, it will be far harder to make the case that tighter policy is necessary.  Historically, hiking into an energy price shock has been a central banking mistake, and I think Warsh knows this and is keen not to repeat it.

Net, for now, everybody loves the dollar and hates risk on this new hawkish Fed narrative.  But going forward, I like the dollar on the back of a better economy and better investments and expect that the hawkish Fed narrative is going to fade away.  But I’m just an FX poet.

Good luck

Adf

No Plan of Action

Posted on by 
In England and Scotland and Wales
Kier Starmer has gone off the rails
A buffoon-like clown
He’s set to step down
As from the Brits eyes, fall their scales

But will his replacement gain traction
Or will Burnham be a distraction
From solving their woes
As Lord only knows
They’ve many, and no plan of action

It has been an eventful weekend for me so let me start by telling you that Marvel was Best of Breed in back-to-back shows last Thursday.  We are very proud and happy.

Second, Friday was a more difficult day for me as I wound up having emergency surgery, although everything is fine.  But I am still in recovery mode.  Sometimes, aging is harder than other times.

With that in mind, we can talk about the three things that matter, I believe, the change of PM in the UK, the on-again-off-again peace talks in Iran and the fact that the yen is now weaker than the level that got the MOF to intervene back in April.

Starting with the UK, PM Starmer has promised to step down now that his most likely successor, Andy Burnham, the former mayor of Manchester, is in Parliament and will now become PM sometime in the next several months depending on the actual timing of certain technicalities.  He is described as left-wing, even by the press, which tells you that he must be quite far to the left.  But the UK has serious problems with respect to their economy, slowing growth and high inflation, and the social structure due to massive immigration, both legal and illegal.  As well, the report that just dropped about the Pakistani grooming gangs that were systematically raping young English girls is so damning, it is hard to believe, yet it was all covered up.  The government doesn’t have to go to the national polls until 2029, so Burnham will have time to try to implement policies, but the nation has many troubles ahead.

As to UK markets, both the pound and FTSE 100 have been underperformers relative to their peer European counterparts over the past month or so as this process has heated up, but in truth, not by very much.  Much of the pound’s weakness can be attributed to dollar strength (see chart below), where the dollar has broken through key technical resistance in the DXY, while the FTSE is just drifting given the lack of positive news.  Certainly, this story didn’t help either one, as both are unchanged on the day.

Source: tradingeconomics.com

In Switzerland, talks are ongoing
As Trump and the Mullahs try showing
That they are the ones
Who have the most guns
But progress seems like it is growing

It cannot be a great surprise that there is a lot of bluster from both sides of this negotiation between the US and Iran as President Trump tries to end the conflict in Iran.  After all, both sides are famous for their bluster!  And you can read whatever you like from whatever source you want to get your spin, but I’m not smart enough to understand the intricacies of international diplomacy.  However, what I do understand is market price movement, and here we are this morning, with oil prices falling further, down -2.5%, and back to levels last seen in early March, right at the beginning of this conflict.

source tradingeconomics.com

Thus far, every story about tank bottoms being reached and an insufficient amount of oil for the pipeline infrastructure to be effective has proven not to be true.  There is still a large group of analysts who are calling for end of days, but the market signals just don’t agree.  I suspect that the only ones who really want to see oil prices remain high are the oil companies who sell the stuff, but for the rest of the world, lower is clearly better.  Obviously, anything can still happen, but by all appearances, it seems that more and more traffic is flowing through the Strait and we are going to see lower prices going forward.

In the end, from my vantage point thousands of miles away from the action, it appears that Iran was greatly weakened by this conflict on a military basis, but more importantly, every one of its Gulf neighbors realized that they needed alternative routes to get their oil to market, and we are going to see a lot more pipeline infrastructure built to do just that, so as time goes by, this choke point is going to lose its effectiveness.  And that is probably a bigger weakness for Iran, as that was something they held over the world, but now it seems it is not as impressive a strength as it had been made out to be in the past.

It’s no waterfall
But the yen keeps dripping down
Whence the BOJ?

Finally, the yen (-0.3%) is having a tough time right now as it has traded back to its lowest level vs. the dollar since 1986!  That’s right folks, it has been forty years since USDJPY traded above 162.00, and we are pushing that level right now as you can see in the chart below.

The last two times the yen reached these levels, back in April and in July 2024, the BOJ intervened in the markets aggressively.  But so far, crickets.  I think the issue for them is the dollar continues to be quite strong, especially as traders are now pricing in rate hikes by the Fed, and so intervening is going to be a waste of money.  And it’s true, if the dollar is rallying across the board, there is very little Ueda-san can do.  As I have repeatedly said, the only way for the yen to break this slide is for serious fiscal and monetary policy changes, and frankly, that doesn’t look like it is in the cards right now.  While I know there are many who think the dollar is heading to its graveyard, it apparently still has a bit of life left in it.

Which takes us to the overnight activity.  Equity markets have been mixed as all this new information gets digested.  In Asia, Tokyo (+1.6%) and China (+2.4%) both had strong sessions although HK (-0.7%) couldn’t keep up.  Elsewhere in the region, there was slightly more green than red led by Taiwan (+2.75%) while the Philippines (-1.65%) was the biggest laggard.  Uncertainty continues to reign although as the Iran situation slowly resolves, I expect to see things brighten here as Asia was the region hurt most by the entire conflict.

In Europe it is also a mixed picture with the UK (+0.3%) now rallying on the news that Starmer is leaving and Spain (+0.4%) has managed a gain as well while both Germany (-0.3%) and France (-0.7%) are lagging this morning, although there is no news of note in either place.  US futures are basically unchanged at this hour (7:15).

In the bond market, Treasury yields (+3bps) have edged higher this morning, I guess on this new belief in higher Fed funds, although I would have thought the bond market would appreciate a hawkish Fed fighting inflation.  European sovereign yields, though, are lower across the board down about -2bps everywhere.  Bonds remain less interesting now that they are back in their ranges and not breaking out as so many though was occurring back in May as per the below chart.

Source: tradingeconomics.com

With oil prices lower, it should be no surprise that gold (+1.35%) and silver (+2.4%) are both higher this morning.  Many have made the case that with the dollar strengthening, the precious metals complex will remain under pressure, and it is a valid case, but for some reason, I have a feeling it will not be as dramatic as they believe.

Finally, the dollar is firmer across the board this morning, albeit not by very much.  Wednesday and Thursday of last week were the big moving days in the wake of the FOMC meeting and the new hawkish read.  Since then, not much has happened, just a slow drift higher across the board.  FWIW, I don’t think that Chairman Warsh is going to be that hawkish, but I look forward to the structural changes that he makes.  However, for now, that is the market assessment.

On the data front, there is nothing today and really nothing of import until Thursday so I will go through it tomorrow.

That’s how things are shaping up, with the dollar gaining, oil sliding and stocks uncertain what to do next.  I am a fan of uncertainty as it will reduce systemic risk, and that is something we really need to see.

Good luck

Adf

Many Malign

Posted on by 
Said Trump, come next Friday I’ll sign
A deal, and though many malign
The war with Iran
It’s all gone to plan
As they’ve lost their arms and their spine

Thus, oil has fallen in price
While gold and stocks rose in a trice
With bears in retreat
For Trump’s next great feat
Some midterm success would be nice

This is a look at the major energy futures markets according to tradingeconomics.com at 5:15 this morning

Sharp declines on the session in the wake of the announcement, confirmed by the Iranians, that a deal had been struck and that the Strait of Hormuz would be reopening by Friday after the mines are cleared.  And while there has been much discussion over the past week, as you can see in the far-right column, energy prices are still largely higher year-to-date with only NatGas the exception.

To my mind, the question becomes, just how quickly prices continue to decline, and can gasoline prices, the one that matters most to the US consumer, slide back to the $2.00/gallon level that we saw prior to the war?

As you can see from that chart below, it still has a long way to fall, but if the Strait remains open, I suspect it will round trip by the end of the summer, just in time for people to start considering their voting habits.

Source: tradingeconomics.com

Remember this, as well, how much have you heard about Venezuela lately?  Back in January, less than six months ago, the US captured and remanded Nicholas Maduro into custody and the world was up in arms.  I would wager that most people don’t even remember it happened!  Memories are very short for global events like this (consider the fact that the Russia – Ukraine war continues and it never even makes the proverbial papers anymore).  For President Trump, the outcome of this situation will be a massively degraded Iranian military with pretty much the rest of the GCC aligned against everything they stood for, an economy that continues to demonstrate remarkable resilience, high stock prices and the likelihood that inflation, as oil prices slide, will be heading back closer to the theoretical 2% target.

There once was a time central banks
Were saviors, and we would give thanks
For all of their aid
When, problems, they slayed
And bankers, they all would close ranks

But last week the ECB raised
Tonight, Ueda-san will be praised
For hiking rates too
So, what will Warsh do?
On Wednesday when his trail is blazed?


Meanwhile, we are in the midst of the monthly central bank onslaught as last week, Madame Lagarde and the ECB raised their base rate by 25 basis points, blaming the ongoing rise in oil prices for leading to inflation.  Of course, 96 hours later, with the announcement by both sides of a deal to end the Iran conflict, this is likely to be seen as an error, the full Trichet as it were.

Tonight, the BOJ meets and all signs are that they, too, are going to be hiking rates by 25bps tonight, to 1.00%, which you will have heard is the highest in more than 30 years.  It’s funny, the official inflation data from Japan is showing a reading of 1.4%, below their target, and now that the prospect of oil prices falling more sharply has increased, it feels like they may be on the cusp of an error here as well.  Consider that of all the governments around, the Japanese with a debt/GDP ratio of about 250% is the nation least able to absorb higher interest rates.  

Which takes us to Wednesday’s FOMC meeting, the first under Chairman Warsh.  There is a long Nick Timiraos article this morning in the WSJ ostensibly explaining that Warsh would like to see less Fed communication, including killing the dot plot, and have the cacophony of Fed speakers shut up.  First, Timiraos has real skin in this game because while he was Powell’s go to, I doubt he will be Warsh’s, thus Timiraos’s status is about to be hit hard.  In fact, the article read as though Powell was writing it to make it seem as though Warsh’s ideas are all wrong.

Personally, I am in favor of less communication by the Fed as policy uncertainty will result in significantly reduced positioning in the speculative community and that is a net benefit for the rest of the market.  Plus, if there is a hiccup, there is less reason for a bailout.  We shall see.  It seems highly unlikely that they move on Wednesday, but we should at least get an inkling of how things may evolve going forward.

So, let’s turn to the markets.  It is no surprise that risk is on everywhere this morning after the Trump announcement so briefly, here is a screenshot from 6:40 this morning showing equity futures markets higher across the board.

Source: tradingeconomics.com

While these are just the major markets, the reality is that markets are higher everywhere except Oslo, as the decline in oil prices hits the Norwegian stock market.  But otherwise, it is universal.

Bond yields are lower across the board as well, with Treasuries (-4bps) leading the way and all of Europe seeing sovereign yields decline by between -4bps and -6bps as the inflation story follows oil lower.  JGBs, too, slipped -4bps overnight and are down -17bps in the past week!

But oil remains the story because its movement is what is driving the narrative.  And, interestingly, there is still strong support from one side of the argument that we are close to hitting tank bottoms and prices are going to shoot higher.  We have heard from both Chevron and Exxon that it is a dangerous situation and even the reopening of the Strait may not happen in time to stop it.  But consider if you are Exxon or Chevron, high oil prices are what you need as you sell your inventory rich and drilling is much more profitable.  And one thing they have is a lot of inventory in their refinery systems.  It hardly seems likely they would be out touting the deal as great and talking prices down.  We have heard throughout the conflict that in a few weeks, prices would spike higher as shortages developed, but that has never happened.  I go back to my view that ignoring market prices in favor of the narrative is a mistake.  At this point, with WTI at $80/bbl, I will argue we will see $50 long before we ever see $100 again.

As to metals markets, based on recent price action, it should be no surprise that gold (+2.75%), silver (+4.3%) and copper. (+0.7%) are all rallying on the lower inflation => lower interest rates => increased commodity demand.

Finally, the dollar is under pressure generally as the DXY (-0.25%) is a pretty good proxy for most things.  In truth, we are seeing some larger movements (INR +0.7%, SEK +0.8%, ZAR +0.6%, CHF +0.6%) all responding to the lower oil price, and in the case of the rand, the higher gold price.  However, there are two outliers here.  NOK (0.0%) is, not surprisingly, unable to show any traction, as like the Norwegian stock market, declining oil prices are a drag here, and JPY (+0.1% and still above 160.00).  The latter must really be concerning to Ueda-san as in a broad dollar decline, if the yen can’t gain traction, that is a real problem.

On the data front, there is a bunch of stuff, but other than Retail Sales on Wednesday, all of it is second tier.

TodayEmpire State Manufacturing14.0
 IP0.3%
 Capacity Utilization76.2%
TuesdayRBA rate decision4.35% (unchanged)
 Housing Starts1.44M
 Building Permits1.41M
WednesdayRetail Sales0.5%
 -ex autos0.5%
 FOMC rate decision3.75% (unchanged)
ThursdayInitial Claims232K
 Continuing Claims1790K
 Philly Fed10.0
 Leading Indicators0.1%

Source: tradingeconomics.com

In addition to all that, the G7 meets this week, starting this evening in Evian, France with French President Macron leading the group.  

As always there is a great deal of naysaying out there as the joint announcement of a deal between the US and Iran has upset the applecart for many narrative writers, and they are committed to their positions.  Personally, I am very happy to see the deal, although it was early as I had anticipated a July 4th outcome, but in this case, a much better result.  I guess it will take some time before it is clear if things are truly operating more normally again, but market pricing is demonstrating a willingness to believe.

With this in mind, the dollar should remain under some pressure for now, as prospects for a Fed rate hike are going to fade, although they haven’t yet according to the futures market, but if anything, that will simply mean that the US will suck in more global capital as the US economy continues to outperform elsewhere.  Ultimately, that will benefit the greenback.

Good luck

Adf