Another Broadside

Posted on March 25, 2025 by fxpoet

Investors don’t know where to hide
As Trump lands another broadside
Last night he did roil
All those who buy oil
From Vene, with tariffs applied

But yesterday, too, he amended
How tariffs would soon be extended
The lesson to learn
Is you’ll ne’er discern
His methods, so don’t be offended

Once again, the tariff game changed yesterday, although this time in two directions. The first, and newest idea is that the US will impose “secondary” tariffs on all nations that buy oil from Venezuela. The idea is to pressure Venezuela to concede to US demands by reducing the market for their one exportable commodity, at least the only one in demand (Tren de Aragua gang members, while a key export, have limited demand it seems). This decision is being described as a new tool of statecraft, but it strikes me this is no different than previous international efforts like the apartheid movement, by isolating a nation for its behaviors. Regardless, this was seen as bullish for oil prices. The reason, as eloquently explained by Ole Hanson, Saxo Bank’s Head of Commodity Strategy, as per the below, is that Venezuelan and Iranian oil production has risen significantly over the past 4 years, offsetting the production cuts of the rest of OPEC+. Take that oil out, and the demand/supply balance tips toward more demand.

It remains to be seen how this impacts specific countries, but apparently, China is the largest importer of sanctioned crude, so obviously, not a positive for President Xi. Alas for Chevron, the deal they cut with the Biden administration to restart activity in Venezuela is looking shakier by the day.

But that is only one of the tariff stories. The other was that there may be changes to previously expected actions come April 2^nd, with imposition of tariffs being a bit more gradual nor as widespread as initially feared. Recall, the idea of the reciprocal tariffs was almost every other nation charges higher tariffs on US goods than the US charges on their goods, so simply raising US tariffs to their levels would be effective. The next step was focusing on the so-called “Dirty 15” nations that run the major trade surpluses with the US, but now he has indicated that some nations will get breaks. I particularly loved this comment, “I may give a lot of countries breaks. They’ve charged us so much that I’m embarrassed to charge them what they’ve charged us, but it’ll be substantial, and you’ll be hearing about that on April 2.”

In any event, Trump’s specialty is his ability to think outside the box, or perhaps more accurately, break the box and move to a different container. There is much consternation amongst business managers, and understandably, since planning is much more difficult in this environment. However, as I have repeatedly written, the one thing on which we can count is continued higher volatility across all markets. That condition requires a robust hedging plan for all those who have exposures, that is your only realistic protection.

Other than the tariff story, though, we have not seen much new information so let’s take a look at how markets have handled the latest tariff saga. Yesterday’s broad US equity rally, on the back of a reduced tariff outlook, was followed by less positive price action in Asia. While the Nikkei (+0.5%) rallied, potentially on the yen’s recent weakness, Hong Kong (-2.4%) was under great pressure on a weaker tech sector as earnings there were disappointing last quarter. However, the CSI 300 (0.0%) which has far less tech in its makeup, didn’t budge. As to the rest of the region, there were more gainers (Taiwan, Malaysia, New Zealand, Indonesia) than losers (Korea, Philippines, Thailand), so arguably the US rally and tariff story helped a bit.

In Europe, though, things are looking solid this morning with green everywhere on the screen and generally substantially so. The DAX (+0.9%), CAC (+1.2%) and IBEX (+1.1%) are all having solid sessions after German Ifo Expectations data was released a touch better than expected at 87.7, but as importantly, 2 points better than last month. However, a look at the history of this index shows that while recent data has turned mildly positive, compared to its long-term history, things in Germany remain in lousy shape.

Source: tradingeconomics.com

As to US futures, at this hour (7:10), they are little changed on the day as traders await the next pronouncements with great uncertainty.

In the bond market, though, yields have been climbing everywhere with Treasury yields higher by 2bps this morning after jumping 5bps yesterday. In fact, we are back at the highest levels in a month, although still well below the peaks seen in early January or last spring. But this move has dragged European sovereign yields along for the ride with across-the-board gains of 4bps-5bps and similar movement in JGBs overnight. One of the alleged reasons for this bond weakness were hawkish comments from two ECB members, Slovakia’s Kazimir and Estonia’s Müller. However, dovish comments from Greece’s Stournaras and Italy’s Cipollone would have seemed to offset that, and did so in the FX markets, but not in the bond market.

Turning to commodities, oil (+0.4%) continues to climb and is once again approaching $70/bbl. In fact, since that fateful day, March 11^th, it has rallied consistently as can be seen below. I still don’t understand why that date seemed to offer a change of view, but there you go.

Source: tradingeconomics.com

In the metals markets, this morning is once again seeing a bullish tone with both precious and industrial metals in demand. Gold (+0.5%) continues to be one of the best performing assets around, although so far this year silver (+1.5%) and copper (+1.15%) have been amongst the few things to beat it. I believe this trend has legs.

Finally, the dollar is softer this morning, falling against both its G10 and EMG counterparts almost universally. SEK (+0.9%) is the leader in the clubhouse, although we have seen solid gains from AUD (+0.5%) and NZD (+0.6%) with both the euro (+0.2%) and pound (+0.2%) lagging the pace but in the same direction. JPY (+0.4%) which has suffered a bit lately, is following the broad dollar move this morning. in the EMG bloc, the CE4 (+0.4% across all of them) is setting the tone with ZAR (+0.4%) right there. Otherwise, the movement has been a bit more modest (MXN +0.2%, KRW +0.15%), but still putting pressure on the dollar.

Turning to the data, as I never got to show the week ahead, here we go:

Today	Case-Shiller Home Prices	4.8%
	Consumer Confidence	94
	New Home Sales	680K
Wednesday	Durable Goods	-1.0%
	-ex Transport	0.2%
Thursday	Initial Claims	225K
	Continuing Claims	1890K
	GDP Q4 Final	2.3%
	GDP Final Sales Q4	3.2%
	Goods Trade Balance	-$134.6B
Friday	Personal Income	0.4%
	Personal Spending	0.5%
	PCE	0.3% (2.5% Y/Y)
	Core PCE	0.3% (2.7% Y/Y)
	Michigan Sentiment	57.9

Source: tradingeconomics.com

Obviously, the PCE data Friday will be the most interesting piece of data released, although we cannot ignore Case-Shiller today. I keep looking at prices rising there at nearly 5% and wondering why economists expect inflation to fall. If home prices are rising 5% per year, and they represent one-third of the CPI, it doesn’t leave much room for other prices to rise to achieve 2.0%. Just sayin’. In addition, we hear from seven different Fed speakers this week. Now, I have been making a big deal about how Fedspeak doesn’t seem to matter as much anymore. Perhaps this week, given the overall uncertainty across markets, it will matter. However, the Fed funds futures market continues to price a bit more than two rate cuts for the rest of the year, which has not changed very much at all in the past month. I still don’t think the Fed speakers matter right now.

Markets are highly attuned to whatever Trump says about tariffs. Absent a new war, and maybe even if one starts, I suspect traders (or algos) will focus on that exclusively. But despite all this, nothing has altered my longer-term view that the dollar will weaken, and commodities remain strong going forward.

Good luck

Adf

Tripping Off Tongues

Posted on March 24, 2025 by fxpoet

Recession is tripping off tongues
And pundits ain’t twiddling their thumbs
Political shades
Are driving tirades
And screams at the top of their lungs

But are we that likely to see
A minus in our ‘conomy?
We certainly could
And probably should
But life doesn’t always agree

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

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

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

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

Key indicators	Dec	Jan	Feb
NFP	323	125	151
Unemployment Rate	4.10%	4.00%	4.10%
CPI	2.90%	3.00%	2.80%
Core CPI	3.20%	3.30%	3.10%
PCE	2.60%	2.50%
Core PCE	2.90%	2.60%
IP	1.10%	0.30%	0.70%
Capacity Utilization	77.60%	77.70%	78.10%
ISM Mfg	49.2	50.9	50.3
ISM Services	54	52.8	53.5
Retail Sales	0.70%	-1.20%	0.20%

Source: tradingeconomics.com

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

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

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

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

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

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

Source: macrotrends.net

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

Ok, let’s look at the overnight activity.

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

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

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

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

Source: tradingeconomics.com

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

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

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

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

Good luck

Adf

Just a Mistake

Posted on March 19, 2025 by fxpoet

It wasn’t all that long ago
That folks really wanted to know
What Jay and the Fed
Implied was ahead
And if more cuts were apropos

But later today when they break
Their words are unlikely to shake
The narrative theme
That whate’er they deem
Important, is just a mistake

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

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

Source: tradingeconomics.com

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

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

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

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

Source: federalreserve.gov

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

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

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

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

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

Source: tradingeconomics.com

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

Good luck

Adf

Not Fraught

Posted on March 18, 2025 by fxpoet

The Retail Sales data did nought
To clarify anyone’s thought
‘Bout growth or inflation
While anticipation
Of Jay, for a change, is not fraught

Meanwhile, tariffs are, once again
A question of how much, not when
Just two weeks from now
The president’s vow
For more, has disturbed market zen

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

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

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

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

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

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

Source: tradingeconomics.com

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

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

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

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

Source: tradingeconomics.com

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

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

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

Good luck

Adf

Starting to Fret

Posted on March 13, 2025 by fxpoet

In DC, they’re starting to fret
That Trump will make good on his threat
If government closes
The risk that it poses
Is markets become quite upset

There is yet another budget showdown in Washington as the Biden administration never passed the bills necessary to fund the government for the rest of this fiscal year ending on September 30^th. The previous continuing resolution (CR) expires at midnight on Saturday and if a new funding law is not enacted, then a government “shutdown” occurs. Now, a government shutdown is not like a company that runs out of money shutting down. Rather roles the President deems essential continue to operate, along with the military, but other roles see the people furloughed until new legislation is passed. Everybody gets paid back wages when things go back to normal.

The situation is that the House of Representatives did pass a CR to fund the government at almost the exact same levels as last year and sent it to the Senate. However, in the Senate, it needs to beat a filibuster, so needs 60 votes to pass and get to President Trump’s desk. However, last night, Senate Minority Leader Shumer declared the Democrats would not support the bill, so would rather have the government shut down. This is a big change from the previous 3 times that there were government shutdowns, because each of those was blamed on Republican intransigence.

In the end, whatever the politics, the market impact has been negative for stocks while bonds held up, even rallied. Of course, previous shutdowns all were amidst very different economic environments as inflation was quiescent and bull markets in both stocks and bonds were extant. As such, arguably, the momentum behind the market was sufficient to offset any concern over the shutdown. But this time markets are already under pressure going into the potential shutdown. I fear that market dislocation, at least in the equity markets, could be far more severe if this one occurs. Something to keep in mind.

The history shows the US
Has long done all things to excess
But now, as they try
With less, to get by
The pundits complain of regress

Reading the WSJ this morning, I couldn’t help but think of the George Costanza opposite day episode of Seinfeld when reading the Heard on the Street column decrying the fact that the Trump administration is seeking to rein in fiscal excess. Of course, this is an issue that has been fodder for the punditry for a long time, how the US was living beyond its means and borrowing too much money. But now, this article is concerned about the opposite. The key concern is that if the US government doesn’t continue to run massive deficits, the economy will slow and corporate profits will fall dramatically, resulting in falling equity prices.

Arguably, this would always be the case if a change of this nature were to be made. And remember, the punditry was all in on making these changes. However, now, they point to Germany and the DAX, which has outperformed US markets over the past several weeks as the model. (chart below from WSJ)

And what is Germany doing so well? Why, they are talking about borrowing an extra €500 billion, eliminating their debt brake that ensures budget deficits remain below 0.35% of GDP, and funding a huge buildup in defense spending. Germany, which has long been seen as the only source of fiscal rectitude is now being lionized for getting rid of that trait. As I said, opposite day!

The lesson, if you haven’t learned it yet, is that the ascendance of Donald Trump to the presidency is going to continuously change many long-held beliefs in governments around the world, as well as in the punditry, who may find that things which seemed great in theory may have consequences previously unconsidered. From a market perspective, this means volatility will continue to be the best estimate for the future.

Ok, let’s turn our attention to markets and see how things performed overnight. After yesterday’s mixed session in the US, where the DJIA could not manage a gain despite cooler than expected CPI readings, overnight saw a mixed picture as well. Japan was either side of unchanged while both Hong Kong (-0.6%) and China (-0.4%) slipped as did most other Asian markets with Malaysia (+1.7%) the true exception. In Europe, though, screens are green as excess government spending is rewarded, although the gains are modest, 0.3% or so.

On the topic of excess spending regarding Germany, I read yesterday that the plan to alter the constitution may have serious problems (meaning that spending may not materialize) because about 50 Bundestag members in the old parliament lost their seats in the election, so it is not clear they will be willing to vote to overturn the constitution during the current lame duck session and allow the debt brake to be set aside for defense purposes. As I said when the story first arose, we are still a long way from Germany paying their own way defensively. US futures, meanwhile, are slightly softer at this hour (7:15).

In the bond market, yesterday saw yields climb a few bps and this morning those trends remain with Treasury yields (+2bps) not climbing as much as European sovereigns (+3bps to 4bps) as there appears to still be a level of confidence that all the extra defense spending will happen. One story that should have Europeans concerned is that the European Commission, in their effort to find funding for their newly found defensive aggressiveness, have spied the €10 trillion in savings that European citizens hold. Frau von der Leyen, the European Commission President was quoted as saying, ”we’ll turn private savings into much needed investment.”

Call me crazy but my economics classes taught me the identity that Savings º Investment, so I am not sure why those savings aren’t already being invested. Perhaps European citizens are not investing where Frau von der Leyen wants and that is the problem. At any rate, I suppose even if Germany fails to overcome its constitutional debt brake, the EU will get there anyway.

In the commodity markets, oil (-0.3%) is edging lower after a nice run for the past several days as it bounced off the bottom of its trading range. Yesterday’s EIA data showed a large draw in gasoline, but I am given to understand that is a seasonal thing (H/T Alyosha). Meanwhile, nothing has dissuaded investors that gold (+0.25%) is a good thing to hold as it rallied further after yesterday’s gains, although both silver (-0.3%) and copper (-0.4%) are a touch softer this morning.

Finally, the dollar is somewhat firmer this morning, albeit not dramatically so. Of course, it has been under significant pressure during the past week+, so this trading response ought be no surprise. SEK (-0.8%) is the laggard in the G10, but you must remember that it has been the leading gainer over the past month. Meanwhile, AUD (-0.5%) and NZD (-0.45%) are also under a bit of pressure this morning, but the rest of this bloc has seen far less movement. In the emerging markets, HUF (-0.6%) is the laggard with the rest of the bloc seeing declines on the order of -0.3% or less. As I said, nothing dramatic here to see.

Yes, yesterday’s CPI data was a bit cooler than anticipated, but as my friend The Inflation Guy™, Mike Ashton, explained here, I wouldn’t get too excited that inflation is collapsing back to the Fed’s 2% target. This morning brings the weekly Initial (exp 225K) and Continuing (1900K) Claims data as well as PPI (headline 0.3%, 3.3% Y/Y; core 0.3%, 3.5% Y/Y). However, given CPI is already out, I don’t think it will have much impact. Rather, as we have observed lately, politics remains the key driver of all market reactions. The unfolding government shutdown in the US and the German debt drama are the two most noteworthy issues right now, but Ukraine and the Middle East are still out there to offer surprises.

Once again, volatility is the only thing about which we can be sure. That said, my confidence is growing that the dollar will decline over time.

Good luck

Adf

Lost In Translation

Posted on March 12, 2025 by fxpoet

The data today on inflation
Will help tweak the latest narration
But arguably
There’s little to see
As CPI’s lost in translation

And too, central bankers have learned
Their comments leave folks unconcerned
Today’s BOC
Where rate cuts will be
The outcome will ne’er be discerned

It is Donald Trump’s world, and we are all just living in it. Virtually everything that happens in any financial market these days is a result of something that President Trump has either said or done. Obviously, tariffs are a major player, but so are the peace talks in Ukraine (good news that Ukraine has agreed a cease fire to get things started) and his domestic initiatives regarding DOGE and the shake up that has come to government from that project. You cannot look at a business journal without reading a story about how corporate America’s CEO’s are very concerned because of all the activity as they are having difficulty planning their strategies.

While this poet endeavors to track the macroeconomic issues and how they impact markets, and one can argue that tariffs are a macro issue, the ongoing back and forth as to which products will get tariffed and when is occurring far more rapidly than is worth reporting on a daily outlook. After all, nobody has any idea what today will bring on that front.

With that in mind, one of the other things I have discussed has been the demotion of central bankers from their previous preeminence in the world of financial markets. Now, every one of them is simply left to respond to whatever President Trump says that day. Consider, the Fed entered their quiet period last Friday and the fact that we have not heard a word from them is entirely inconsequential. The Fed funds futures market is currently pricing just a 3% probability of a rate cut next week and a total of 75bps of cuts by the end of the year, but that has been true for the past several weeks. Despite an increase in the talk of a US recession, the markets are not indicating that is a concern.

Now, that doesn’t mean that other central banks aren’t doing things, but when the BOC cuts rates by 25bps this morning, taking their base rate to 2.75%, 150 basis points below the US, nothing is going to happen in the market. It is already widely assumed. I guess it is possible that Governor Macklem could make some comments of note, but given that Canada remains a bit player on the world stage, does whatever he says really matter? In fact, the only reason people are discussing Canada now is because of President Trump and his trolling former PM Trudeau and calls to make it the 51^st state. Let’s face it, the economy there is ticking along fine for now, although if their exports to the US are impaired by tariffs it will definitely hurt them. Meanwhile, other than a huge housing bubble, nobody really notices them. After all, their economy is roughly $2.3 trillion, smaller than that of Texas.

We have also heard from Madame Lagarde recently as she tries to calm European leaders’ nerves while the ECB tries to manage their policy around US fiscal gyrations. However, the most concerning information from there has been her confirmation that the ECB is pushing forward with their central bank digital currency (CBDC) project, looking to get things started in October of this year. This contrasts with President Trump’s EO that the US will not pursue a CBDC and there is currently legislation in Congress to enshrine that into law. My personal view is a CBDC would be very concerning given its inherent reduction in individual liberties. While the current setup is for the euro to rise relative to the dollar, it is not clear to me that will remain the case in the event the digital euro comes into being. In fact, it would not surprise me if many Europeans decided that holding dollars was a much better idea than holding euros in that environment. But that is a story for the future.

As to today, CPI is set to be released with the following median expectations; headline (0.3%, 2.9% Y/Y) and core (0.3%, 3.2% Y/Y). Both of those annualized numbers are one tick lower than last month’s outcomes, so would help the Fed narrative that inflation is falling back to their target. But again, absent a major discrepancy, something like a 0.1% or 0.5% reading on the core number, I don’t think it will have any market impact across any market. Data is just not that important these days.

Let’s turn to the overnight session to see how things are behaving in the wake of yesterday’s late US equity rebound, where while the indices all finished lower, they were well off the daily lows. In Asia, the picture was very mixed with some major gainers (Korea +1.5%, Indonesia +1.8%, Taiwan +0.9%) and some major laggards (Thailand -2.5%, Malaysia -2.3%, Australia -1.3%, Hong Kong -0.8%) with both Japan and mainland China showing little movement. In Europe, after a down day yesterday, this morning is seeing a solid rebound across most major markets with the DAX (+1.8%) leading the way followed by the CAC (+1.4%) and FTSE 100 (+0.6%). Some solid earnings reports and ongoing ~~hope~~ belief that European defense spending will ramp up seems to be the drivers. As to US futures, at this hour (7:30) they are firmer by 0.8% ish across the board.

In the bond market, after Treasury yields climbed 7bps yesterday, this morning they have edged a further 1bp higher. The big domestic story is the continuing resolution which was just passed by the House and now sits at the Senate. If it is not passed by Friday, the government will shut down, although it is not clear to me how that can be more disruptive than the way things have been operating for the past 6 weeks! Meanwhile, European sovereign yields are also edging higher with German bunds (+4bps) leading the way as the ongoing discussion over breeching the debt brake continues and concerns over massive new issuance remain front and center. Elsewhere in Europe, yields have risen as well, but generally by only 1bp or 2bps. Last night, JGB yields didn’t move at all.

In the commodity bloc, oil (+1.1%) is continuing to bounce along the bottom of its trading range as per the below chart.

Source: tradingeconomics.com

A look at the trend line there shows that, at least based on the past 6 months, there has not been any net movement of note. The question of whether the Ukraine war ends and that allows Russian oil back into the market, out in the open, is also current, with no clear answer in sight. Meanwhile, the metals markets continue to ignore the recession calls with silver (+0.7%) and copper (+2.3%) both strong although gold is unchanged on the day.

Finally, the dollar is bouncing slightly this morning after declining sharply in 5 of the past 7 sessions with the other two basically unchanged. This has all the hallmarks of a trading pause as there is nothing that has altered the idea that President Trump wants the dollar lower, and his policies are going to push it in that direction. The one big outlier this morning is CLP (+0.9%) which is tracking copper’s rally, but otherwise, the yen (-0.6%) is the only mover of note, and that also seems a trading response, certainly not a fundamental change.

And that’s really it. CPI is the only data for the day and there are no Fed speakers. Of course, tape bombs are the new normal and we never have any idea what President Trump or Secretary Bessent may say at any given time. However, with that in mind, the bigger picture remains intact. I remain negative the equity space overall as changes continue, while the dollar is likely to remain under pressure as well. This should help the bond market, and commodities.

Good luck

Adf

Trumpian Thunder

Posted on March 11, 2025 by fxpoet

No respite was found yesterday
With risk assets given away
Now traders all wonder
If Trumpian thunder
Will ever, a rally, convey

But from the cheap seats what seems clear
Is Trump, for right now, will adhere
To efforts to trim
The grift and the skim
A prospect his enemies fear

The only discussion in markets today is about yesterday’s sharp declines in equity markets. Questions about how long this can continue or how long President Trump can withstand the pain that accompanies these declines are rampant. However, thus far the indications are that he and his administration are aware of the risks but also committed to achieving his goals of more domestic manufacturing activity and a perceived fairness or leveling of the international commerce playing field.

We have heard from Trump, Bessent and Commerce Secretary Lutnick, that there is going to be some pain, but they believe it will be short-lived in nature. And ask yourself this, given how overextended both market valuations and debt metrics had become, was there any way to address these issues (assuming you believed they were issues) without some pain? Of course not. I have long maintained that what needs to happen in the US economy is for markets to be allowed to clear, all markets, whether housing or financial, and that we have not seen that happen for more than 50 years.

While perhaps the case can be made that the housing market came close to clearing in the wake of the GFC, consider what has happened since then with the implementation of waves of QE and ZIRP. The chart below from the St Louis Fed’s FRED database shows their housing index over time. Ask yourself if you think the housing market really cleared? And more importantly, look at the acceleration since then. President Trump has made clear his focus is on Main Street, not Wall Street, and it is easy to argue that a key driver of this massive rise in house prices has been the Fed and their efforts to prop up Wall Street. Reversing that is going to be painful. Hell, simply stopping that move will be painful.

As to equity markets, the only clearing event that we have seen was the crash of the NASDAQ after the tech bubble burst in 2000. But again, the Fed was there cutting rates and easing policy to support things. The best evidence that equity markets are at unsustainable levels comes from the valuation metrics, with things like the Shiller CAPE ratio pushed to levels only ever seen in that tech bubble, and clearly significantly above long-term mean (17.21) and median (16.03) levels with today’s current reading of 35.34.

Source: multpl.com

All of this is my way of saying that I do not believe we are anywhere near the end of this process. While many of you don’t remember President Reagan, at the beginning of his first term, he stood by Fed Chairman Volcker in his efforts to squelch inflation, when Volcker raised Fed funds to 22.0% (see below) and the economy suffered two quick recessions in 1980 and 1982.

However, that was the medicine that was needed to break inflation’s back and begin a 40-year run of stability and growth in the US amid low inflation. It is not hard to believe that we are going to need to see another cleansing bout of austerity to once again reset the economy. And remember, Trump is not running again, so is not worried about reelection. If we do have a recession soon, it will likely be over and the recovery under way as we head into the next elections, a perfect political outcome for his party.

Ok, let’s see how other markets responded to yesterday’s US declines. In Asian equity markets, Tokyo (-0.6%) slid, but nowhere near the declines seen in the US. China (+0.3%) and Hong Kong (0.0%) basically ignored the situation, but the rest of Asia saw a lot more red on the screen with large losses seen in Korea, Taiwan, Australia, Malaysia, Singapore and the Philippines. In Europe, though, the price action is mixed with some gainers (DAX +0.4%, CAC +0.2%) and laggards (IBEX -0.2%, FTSE 100 -0.15%) as it appears funds continue to flow from the US markets to Europe on the back of the mooted defense buildup. US futures at this hour (7:10), are very modestly higher, 0.15% across the board, but my take is there is further pain to come.

In the bond market, yesterday saw a flight to safety with Treasury yields sliding 10bps and although we did not see similar moves in European sovereigns. This morning, Treasury yields are unchanged from the close while European bonds are showing modestly higher yields, between 1bp and 3bps. JGB’s though, saw yields follow Treasuries lower, dropping -6bps last night as not only did US yields fall, but Japanese Q4 GDP data was released at a weaker than preliminarily reported 2.2%. Although that was higher than Q3, and represents solid growth, it is not quite what was in the market.

In the commodity market, oil (+0.9%) while higher this morning continues to hold its downtrend as per the below chart. With further Russia/Ukraine peace talks starting up in Saudi Arabia, the prospects of Russian oil coming back to the market seem to be growing.

Source: tradingeconomics.com

As to the metals markets, gold (+1.0%) is the laggard this morning with both silver (+1.6%) and copper (+1.9%) leading the space higher. If US equities are responding to a growing probability of a US recession, then I would have expected the industrial metals to soften. However, after several down days, this could well be just a reflexive trading bounce. We will need to see further movement to get a better sense of things.

Finally, the dollar remains under pressure generally with the euro (+0.5%) once again gaining ground and touching the 1.09 level for the first time since the US presidential election. Not surprisingly, that has dragged the CE4 currencies higher as well, but the dollar’s weakness is seen vs. CNY (+0.4%), KRW (+0.5%), SEK (+0.45%), NOK (+0.8%) and even CAD (+0.25%). Again, the big picture here is that the current policy aims for the US have begun to alter the concept of US exceptionalism with regards to the stock market. As funds flow elsewhere, the dollar is quite likely to continue to decline. This will be reinforced if we continue to see 10-year Treasury yields decline.

On the data front, while today is not very exciting, we do see CPI and PPI this week.

Today	JOLTS Job Openings	7.75M
Wednesday	CPI	0.3% (2.9% Y/Y)
	Ex food & energy	0.3% (3.2% Y/Y)
Thursday	Initial Claims	225K
	Continuing Claims	1910K
	PPI	0.3% (3.3% Y/Y)
	Ex food & energy	0.3% (3.6% Y/Y)
Friday	Michigan Sentiment	66.3

Source: tradingeconomics.com

We are now in the Fed’s quiet period so there are no Fed speakers until their meeting next Wednesday, but as I have been saying, nobody is really paying much attention to them anyway. I think we have seen some major changes evolve and that means that equities are likely to remain under pressure along with the dollar, while bonds should hold their own.

Good luck

Adf

In a Trice

Posted on March 10, 2025 by fxpoet

The calendar’s not e’en turned twice
Since Trump, with JD as his Vice
Have taken the reins
And beat up on Keynes
While weeding out waste in a trice

For markets, the problem, it seems
Is rallies are now merely dreams
So, equity buyers
Are putting out fires
While thinking up pump and dump schemes

For bondholders, it’s not so clear
If salvation truly is near
But one thing seems sure
The buck will endure
Much weakness throughout this whole year

We have not even reached 50 days of a Trump presidency as of this morning and nobody would fault you if you estimated we had three years of policies enacted to date. The pace of changes has been blistering and clearly most politicians, let alone investors, have not been prepared for all that has occurred.

One of the things that I read regularly is that Trump is destroying the Rules Based Order (RBO) which was underpinned by the Pax Americana of the US essentially being the world’s policeman. This is cast as a distinct negative under the premise that things were going great and now, he is upsetting the applecart for his own personal reasons. Of course, market participants had grown quite accustomed to this framework, had built all sorts of models to profit from it and with the Fed’s help of monetization of debt, were able to gain significantly at the expense of those without market linked assets. Hence, the K-shaped recovery.

But while that is a lovely narrative, is it really an accurate representation of the way of the world? If the US was truly the world’s policeman, and we certainly spend enough on defense to earn that title, perhaps it was time for the US to be fired from that role anyway. After all, there is currently raging military conflict in Ukraine, Lebanon, Syria, Congo, Sudan and the ongoing tensions in Gaza. That’s a pretty long list of wars to claim that things were going great.

Secondly, the question of financing all this conflagration, as well as other economic goals, notably the alleged transition to net zero carbon energy production, appears to be reaching the end of the line. While the US can still borrow as needed, (assuming the debt ceiling is raised), the reality is that the US gross national debt outstanding is greater than $36,000,000,000,000 relative to GDP that is a touch under $28,000,000,000,000. On a global basis, total (not just government) debt is in excess of $300,000,000,000,000 while global GDP clocks in somewhere just north of $100,000,000,000,000. Arguably, on a credit metric basis, the world is BB- or B+, a clear indication that all that debt is unlikely to be repaid.

If we consider things considering this information, perhaps the RBO had outlived its usefulness. Arguably, the loudest complaints are coming from those who benefitted most greatly and are quite unhappy to see things change against them. But as evidenced by the polls taken after President Trump’s speech last Tuesday evening, the bulk of the American public is still strongly supporting this agenda. The idea that the president and his Treasury secretary are seeking to engineer a short-term recession early, blame it on fixing Biden’s mess, and having things revert to stronger growth in time for the 2026 mid-term elections is not crazy. In fact, there have been several comments from both men that short-term pain would be necessary to achieve a stabler, long-term gain.

So, what does this mean for the markets? You have no doubt already recognized that volatility is the main event in every market, and I don’t see that changing anytime soon. But some of the themes that follow this agenda would be for US equities to suffer relative to other markets, as the last decade plus of American exceptionalism, led by massive deficit spending and borrowing, would reverse under this new thesis. Add to this the sudden realization that other nations are going to be investing significantly more in their own defense, and money will be flowing out of the US into Europe, Japan and emerging markets around the world.

Bonds are a tougher call as a weaker economy would ordinarily mean lower yields, but the question of tariff impacts on prices, as well as reshoring, which, by definition, will raise prices, could mean we see the yield curve steepen with the Fed cutting rates more aggressively than currently priced, but 10-year and 30-year yields staying right where they are now.

I believe this will be a strong period for commodities as all that foreign capex will be a driver, as will the fact that, as I will discuss shortly, the dollar is likely to underperform significantly. Gold will retain its haven characteristics as well as remain in demand for foreign central banks, while industrial metals should hold their own. As to oil, my take is lower initially, as OPEC returns its production and slowing GDP weighs on demand, at least for a while, although eventually, I suspect it will rebound along with economic activity.

Finally, the dollar will remain under significant pressure across the board. Clearly, Trump is seeking a weaker dollar to help the export industries, as well as discourage imports. Add to this the potential for lower yields, lower short-term rates, and an exit of equity investors as US stocks underperform, and you have the making of at least another 15% decline in the greenback this year.

With this as backdrop, we need to touch on three key stories this morning. First, Friday’s NFP report was pretty much in line with expectations at the headline level but seemed a bit weaker in some of the underlying bits, specifically in the Household Survey where a total of 588K jobs were lost and there was a large increase in the number of part-time workers doing so for economic reasons. Basically, that means they wanted full-time work but couldn’t find a job. Markets gyrated after the release, with yields initially sliding but then rebounding to close higher on the day. Equities, too, closed higher on the day although that had the earmarks of a relief rally after a lousy week overall. The thing about this report is that it did not include any of the government changes that have been in the press, so next month may offer more information regarding the impact of DOGE and their cuts.

The second story comes from north of the border where Mark Carney, former BOC and BOE head, was elected to lead the Labour Party in Canada and replace Justin Trudeau. As is always the case, when there is new leadership, there is excitement and he said he will call for a general election in the next several weeks, ostensibly to take advantage of this new momentum. It seems that President Trump’s derision of not only Trudeau, but Canada as well in many Canadian’s eyes, will play a large role with the two lead candidates, Carney and Poilievre, fighting to explain that they are each better placed to go toe-to-toe with Trump on critical issues.

Here’s the thing, though. Despite much angst about the US-Canada relationship on the Canadian side of the border, the market viewpoint is nothing has really changed. a look at the chart below shows that after a bout of weakness for the Loonie in the wake of the US election and leading up to Trump’s tariff announcements, USDCAD is basically unchanged since mid-December, with one day showing a spike and reversal in early February. My point is that the market has not, at least not yet, determined that the Canadian PM matters very much.

Source: tradingecoomics.com

The last story to discuss is Chinese inflation data which was released Saturday evening in the US and showed deflation in February (-0.7% Y/Y) for CPI and continuing deflation in PPI (-2.2%). In fact, as you can see from the below chart, PPI in China has been in deflation for several years now. Recently there have been several articles explaining this offers President Xi a great opportunity for significant stimulus because no matter how much the government spends and how much debt they monetize, inflation won’t be a problem for a long time to come. I would counter that given deflation has been the norm for several years, they have had this opportunity for quite a while and done nothing with it. Why will this time be different? Ultimately, the default result in China is when things are not looking like they will achieve the targeted growth of “about 5%”, you can be sure there will be more investment to build things up adding still more downward pressure on prices as production facilities increase.

Source: tradingeconomics.com

The renminbi’s response to this news has been modest, at best, with a tiny decline overnight of -0.25%. And a look at the chart there shows it is remarkably similar to the CAD, with steady weakness through December and then no real movement since then. Given the dollar’s recent weakness overall, this seems unusual. Although, we also know that China prefers a weaker currency to help support their export industries, so perhaps this in not unusual at all.

Source: tradingeconomics.com

Ok, this note is already overly long, so will end it here. We do have important data later this week with both CPI and Retail Sales coming. As well, the consensus from the Fedspeak is that they are pretty happy right here and not planning to do anything for a while.

The big picture is best summarized, I believe, by the idea that we are at the beginnings of a regime change in markets as discussed above. Volatility continues to be the driving force, so hedging remains crucial for those with natural exposures.

Good luckAdf

Dynamited

Posted on March 6, 2025 by fxpoet

Investors don’t seem that excited
‘Bout Germany’s now expedited
Designs to rearm
And that caused much harm
To Bunds, with their price dynamited

One of the biggest impacts of President Trump’s recent friction with Ukraine and its security is that European nations now realize that their previous ability to make butter, not guns, because the US had enough guns for everybody is no longer necessarily the case. Mr Trump’s turn inward, which should be no surprise given his campaign rhetoric and America First goals, apparently was a surprise to most European leaders. It seems they couldn’t believe the US would change course in this manner. Regardless, the upshot is that Europe finds itself badly under armed and is now promising to change this.

The country best placed to start this process is Germany, where soon-to-be Chancellor, Friedrich Merz has promised a €500 billion spending spree on new defense items. However, as the Germans don’t have this money laying around, they will need to borrow it. The wrinkle in this plan is that enshrined in Germany’s constitution is a debt brake designed to prevent fiscal profligacy, kind of like this. So, Merz has proposed waiving the debt brake for defense expenditures, but in order to do so, will need a two-thirds majority vote in the Bundestag (German parliament). Now given AfD has been quite anti-war, it is not clear he will be able to obtain the requisite votes but for now, that is not the concern.

However, the German bund market clearly believes he will be successful as evidenced by the chart below. Overall, German 10-year yields rose 30bps yesterday, a dramatic move, and dragged most European sovereigns along for the ride as the new narrative is that all European nations will increase borrowing to spend on their defense. It is worth noting, though, that the reason German yields have been so low is because the economy there has been exhibiting approximately 0% growth for more than a year as they continue to commit ~~energy suicide~~ seek to achieve their idealistic greenhouse gas emission goals.

Source: tradingeconomics.com

The trick, though, is that while Germany, with a debt/GDP ratio around 60%, has plenty of fiscal space to follow through, assuming they can alter their constitution, the rest of Europe is in a much more difficult spot with both France and Italy already under EU scrutiny for their budget deficits and debt/GDP ratios. Recall, a key aspect of the Eurozone’s creation was the regulation designed to keep national budget deficits below 3% of GDP and drive the debt/GDP ratios to 60% or below. Right now, Germany is the only nation that fits within those parameters.

While I have no doubt that they will alter the rules as necessary elsewhere in Europe and certainly given the now perceived existential crisis for Europe, those limits are sure to be ignored, the story in Germany remains different because of the constitution. Markets, though, clearly believe that a lot more debt is about to be issued by European nations, hence the dramatic decline in bond prices and jump in yields.

But there are other knock-on effects here as well, notably that the euro is climbing dramatically against the dollar, up nearly 4% in the past week, and far ahead of the pound and most G10 currencies with only the SEK (+1.0% overnight, +6.1% in past week) outperforming the single currency. For a while I have suggested that short-term rates were losing their sway over the FX markets and traders were looking at 10-year yields. Certainly, the recent price action indicates that remains the case as Treasury yields (+2bps) have bounced off their lows but have risen far less than their G10 counterparts. In fact, a look at the movement in 10-year government bond yields over the past month and year reveals just how significant these changes have been.

Source: Bloomberg.com

I feel safe in saying that for the next several weeks, perhaps months, this story of European defensive revival and the knock-on effects is going to be top of mind for both investors and pundits. Only history will determine if these dramatic changes in policy stances will have been effective in reducing the chance of war or not and if they will have been beneficial or detrimental to economies around the world. As much of the current narrative is driven by politics rather than economics, punditry on the latter is going to be worse than usual. Once again, I harken back to the need for a robust hedging plan for all those with exposures. As recent price action across all markets demonstrates, volatility is back, and I believe here to stay for a while.

Ok, let’s run down the rest of the markets not yet discussed. Yesterday’s US equity bounce was widely appreciated by many although this morning, futures markets are all pointing lower by between -0.75% and -1.25%, enough to wipe out yesterday’s gains. As to Asia overnight, Japan (+0.8%) followed the US and both Hong Kong (+3.3%) and China (+1.4%) are continuing to get positive vibes from the Chinese twin meetings of policymakers. More stimulus continues to be the driving belief there although China’s history has shown their stimulus efforts have tended to fall short of initial expectations. As to Europe, this morning only the DAX (+0.5%) is continuing yesterday’s gains as concerns begin to grow that while Germany can afford to spend more money on defense, the rest of Europe is not in the same situation, so government procurement contracts may be less prevalent than initially hoped. This is evident in the -0.4% to -1.0% declines seen across both the UK and most of the rest of the continent.

We’ve already discussed bonds, although I should mention that JGB yields have risen 10bps as well, up to new highs for the move and finally above 1.50%

In the commodity space, oil (+0.65%) which has had a very rough week, falling more than -5% in the past seven days, seems to be finding a bit of support. Recall yesterday’s chart showing the bimodal distribution and that we are now in supply destruction territory. Ultimately, that should support the price, but the timing is unclear. In the metals markets, this morning sees red across the board, although not dramatically so, with both precious and base metals sagging on the order of -0.5%.

And lastly the dollar continues to decline, albeit not as swiftly as yesterday. However, while it is considerably weaker vs. its G10 counterparts, versus the EMG bloc, the story is far less clear. For instance, the only notable EMG currency gaining ground this morning is CLP (+1.2%) while virtually every other major emerging market currency is actually slipping a bit. Look at this list; CNY -0.2%, MXN -0.25%, PLN -0.3%, ZAR -0.15%, INR -0.3% and HUF -0.5%. I have a feeling we are going to see more behavior like this going forward, where G10 currencies are now trading on a different basis than EMG currencies.

On the data front, this morning brings Initial (exp 235K) and Continuing (1880K) Claims as well as the Trade Balance (-$127.4B) and Nonfarm Productivity (1.2%) and Unit Labor Costs (3.0%) all at 8:30. We also hear from two more Fed speakers, Waller and Bostic later in the day. Yesterday’s ADP employment data was much weaker than expected, falling to 77K, while the ISM Services data held up well although the prices paid piece did rise. In addition, there has been a change in tone from the Fed speakers as we are now hearing mention of the possibility of stagflation due to the Trump tariffs, although there was no indication as to which way they will lean if that is the economic path forward.

I continue to highlight volatility as the watchword for now and the near future at least. As long as politics has become the key driver, and as long as President Trump is that driver, given his penchant to shake things up, the one thing of which I am sure is we have not seen the last dramatic change in perception. With that in mind, my view is the dollar will remain under pressure for a while yet.

Good luck

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Things Are Creaking

Posted on March 5, 2025 by fxpoet

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

The Chinese government has outlined a very active agenda for 2025 as the current pace of growth in their economy remains sluggish at best. They continue to focus on a 5% headline GDP target and have promised to increase the budget deficit by a similar amount, so the idea of organic growth seems to be dead. They reiterated their plan to recapitalize the big banks with CNY 500 billion and are looking to raise defense spending by 7.2%. Long term debt issuance will increase with CNY 1.3 trillion planned for this year and they talk about adding 12 million urban jobs. It all sounds fantastic.

But will it work? Of course, there is no way to know yet, but if history is any guide, the mercantilist structure of the Chinese economy remains extremely difficult to overcome and replace with a more consumer-focused economy. The property market there remains in terrible shape and that continues to be a drag on the overall economy as individuals, who had been encouraged to invest in property as a means of creating a retirement nest egg find themselves with much less disposable income and an illiquid and depreciating asset.

President Trump’s tariffs are not going to help them at all, but it is unclear if they will be significantly detrimental. While I would not bet against China reporting 5% GDP growth in 2025, given the questionable reliability of their data, it is not clear it will be reflective of the state of the nation.

My take on market impacts are as follows: Chinese yields will climb as more debt is issued while growth will allegedly increase, Chinese equities should benefit If they are successful at getting things moving, but the yuan will have a harder time in my view, as capital flows to the nation remain stunted. Of course, much will also depend on the evolution of US policy, which has been erratic, to say the least.

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

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

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

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

Source: longtermtrends.net

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

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

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

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

Source: tradingeconomics.com

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

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

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

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

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

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

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

Good luck

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fxpoetry

Explaining the rhyme and rhythm of the FX markets each day

Tag Archives: #trump

Another Broadside

Tripping Off Tongues

Just a Mistake

Not Fraught

Starting to Fret

Lost In Translation

Trumpian Thunder

In a Trice

Dynamited

Things Are Creaking