Confusion

Posted on February 25, 2025 by fxpoet

Confusion continues to reign
O’er markets though pundits will feign
That they understand
The movements at hand
Despite a quite rocky terrain

The speed with which Trump changes views
Can even, the algos, confuse
The pluses, I think
Are traders must shrink
Positions, elsewise pay high dues

For the longest time I believed that the algos were going to usurp all trading activity as their ability to respond to news was so much faster than any human. Certainly, this has been the key to success for major trading firms like Citadel and Virtu Financial. And they have been very successful. I think part of their success has been that we have been in an environment where both implied and actual volatility has declined in a secular manner, so not only could they respond quickly, but they could lever up their positions with impunity as the probability of a large reversal was relatively less.

However, I believe that the algos and their owners may have met their match in Donald Trump. Never before has someone been so powerful and yet so chaotic in his approach to very important things. Many pundits complain that even he doesn’t have a plan when he announces a new policy. But I think that’s his secret, keep everyone else off balance and then he has free reign. Chaos is the goal.

The market impact of this is that basically, for the past three months since shortly after his election, the major asset classes of stocks, bonds and the dollar, have chopped around a lot, but not moved anywhere at all. How can they as nobody seems willing to believe that the end game he has explained; reduced deficits, reduced trade balance, lower inflation and a strong military presence throughout the Western Hemisphere, is going to result from his actions. And in fairness, some of the actions do have a random quality to them. But if we have learned nothing from President Trump’s time in office, including his first term, it is that he is very willing to tell us what he is going to do. It just seems that most folks don’t believe he can do it so don’t take it seriously.

So, let’s look at how markets have behaved in the past three months. The noteworthy result is that the net movement over that period has been virtually nil. Look at the charts below from tradingeconomics.com:

S&P 500

10-Year Treasury

EUR/USD

While all these markets have moved higher and lower in the intervening period, they have not gone anywhere at all. The biggest mover over this time is the euro, which has rallied 0.54% with the other major markets showing far less movement than that.

One interesting phenomenon of this price action is that despite significant uncertainty over policy actions by the President and the implications they may have on markets, and even though recent price action can best be described as choppy rather than trend like, the VIX Index remains in the lowest quartile of its long-term range. Certainly, it has risen slightly over the past few weeks, but to my eye, it looks like it is underpricing the chaos yet to come.

Source Bloomberg.com

While I have no clearer idea how things will unfold than anyone else, other than I have a certain amount of faith that the President will achieve many of his goals in one way or another, I am definitely of the belief that volatility is going to be the coin of the realm for quite a while going forward. We have spent the past many years with numerous strategies created to enhance returns via selling volatility, either shorting options or levering up, and that is the trend that seems likely to change going forward. The implication for hedgers is that maintaining hedge ratios while having a plan in place is going to be more important than any time in the past decade or more.

Ok, let’s take a look at how markets did move overnight. Yesterday’s net negative session in the US was followed by similar price action in Asia. Tokyo (-1.4%), Hong Kong (-1.35) and China (-1.1%) all suffered on stories about tariffs and extra efforts by the Trump administration to tighten up export controls on semiconductors. It should be no surprise that virtually every index in Asia followed suit with losses between -0.3% (Singapore) and -2.4% (Indonesia) and everywhere in between. Meanwhile, in Europe, the picture is not as dour as there are a few winners (Spain +0.9% and Italy +0.5%) although the rest of the continent is struggling to break even. The data point that is receiving the most press is Eurozone Negotiated Wage Growth (+4.12%) which rose less than in Q3 and has encouraged many to believe the ECB will be cutting rates next week. Interestingly, Joachim Nagel, Bundesbank president was on the tape telling the rest of the ECB to shut up about their expectations of future rate moves as there is still far too much uncertainty and decisions need to be made on a meeting-by-meeting basis. Apparently, oversharing is a general central bank affliction, not merely a Fed problem. As to US stocks, at this hour (6:50) they are little changed.

In the bond market, yields continue to slide, at least in the US, with Treasury yields down -6bps this morning and back to levels last seen in December. Apparently, some investors are beginning to believe Secretary Bessent regarding his goal to drive yields lower. As well, he has reconfirmed that there will be no major increase in the issuance of long-dated paper for now. European sovereigns, though, are little changed this morning with only UK gilts (-3bps) showing any movement after the CBI Trades report printed at -23, a bit less bad than expected.

In the commodity markets, oil (-0.15%) is little changed this morning after a very modest rally yesterday. But the reality here is that oil, like other markets, has been in a trading range rather than trending, although my take is that the longer-term view could be a bit lower. Gold (-0.35%), though lower this morning, is the one market that has shown a trend since Trump’s election, and truthfully since well before that as you can see in the chart below.

Source: tradingeconomics.com

Finally, the dollar is a touch softer this morning, with both the euro and pound rising 0.3% alongside the CHF (+0.3%) and JPY (+0.2%). Commodity currencies, though, are less robust with very minor losses seen in MXN, ZAR and CLP. Given the decline in 10-year yields, I am not that surprised at the dollar’s weakness although it is in opposition to the gut reaction that tariffs mean a higher dollar. This is of interest because yesterday President Trump confirmed that the 25% tariffs on Canada and Mexico were going into effect next week. As I explained above, it is very difficult to get a sense of short-term price action here although given the clear intent of the president to improve the competitiveness of US exporters, he would certainly like to see the dollar decline further.

It is very interesting to watch this president reduce the power of the Fed with words and not even have to attack the Chairman like he did in his first term. It will be very interesting to see how Chair Powell responds to the ongoing machinations.

On the data front, this morning brings only the Case-Shiller Home Price Index (exp +4.4%) and Consumer Confidence (102.5). We do hear from two Fed speakers, Barr and Barkin, but as I keep explaining, their words matter less each day. (It must be driving them crazy!)

It is hard to get excited about markets here. There is no directional bias right now and the lack of critical data adds to the lack of information. As well, given the mercurial nature of President Trump’s activities, we are always one tape bomb away from a complete reversal. While I don’t see the dollar collapsing, perhaps the next short-term wave is for further dollar weakness.

Good luck

Adf

Hard to Kill

Posted on February 19, 2025 by fxpoet

Inflation just won’t go away
As evidenced by the UK
This year started out
Removing all doubt
The Old Lady’s work’s gone astray

And elsewhere, the problem is still
Inflation is quite hard to kill
Though central banks want
More rate cuts to flaunt
Those goals are quite hard to fulfill

While most eyes remain on President Trump with his ongoing efforts to reduce the size of the US government, as well as his tariff discussions and efforts to negotiate a lasting peace in Ukraine, we cannot ignore the other things that go on around the world. One of the big issues, which has almost universally been acclaimed a problem, is that inflation is higher than most of the world had become accustomed to pre-Covid. As well, the virtual universal central bank goal remains the local inflation rate, however calculated, to be at 2.0%. Alas for the central bankers in their seats today, that remains quite a difficult reach. A quick look at the most recent headline CPI readings across the G20 shows that only 5 nations (counting the Eurozone as a bloc since they have only one monetary policy) are at or below that magic level as per the below table.

Source: tradingeconomics.com

Of those nations who are below, two, China and Switzerland, are actually quite concerned about the lack of price pressure and seeking to raise the inflation rate, and the other three (Canada, Singapore and Saudi Arabia) are right on the number, with core inflation readings tending higher than the headline reported here.

Perhaps a better way to highlight the problem is to look at the 10-year bonds of most countries and see how they have been behaving of late as an indication of whether investors are comfortable with the inflation fighting efforts by each nation. While it is not universal, you can look at the column on the far right of the below table and see that 10-year yields have been rising for the past year.

Source: tradingeconomics.com

I only bring this up because, despite the fact that I have been downplaying central bank, especially the Fed’s, impact on markets, ultimately, every nation tasks their central bank to manage inflation. That seems reasonable since inflation, as Milton Friedman explained to us in 1963, is “always and everywhere a monetary phenomenon.” But perhaps you don’t believe that and are schooled in the idea that faster growth leads to higher wages and therefore higher inflation. Certainly, Paul Samuelson’s iconic textbook (as an aside, Dr Samuelson was my Economics 101 professor in college) made clear that was the pathway. Alas, as my good friend, @inflation_guy Mike Ashton, wrote yesterday, there is no evidence that is the case. Read the article, it is well worth it and can help you start looking elsewhere for causes of inflation, like perhaps the growth in the money supply!

Of course, the reason that we continue to come back to inflation in our discussions is because it is critical to the outcomes in financial markets. And that is our true focus. It is the reason there is so much discussion regarding President Trump’s mooted tariffs and how inflationary they will be. It is the reason that parties out of power continue to highlight any prices that have risen substantially in an effort to disparage the parties in power. And it is the reason that central banks remain central to the plot of all financial markets, at least based on the current configuration of the global economy. If there was only one financial lesson from the pandemic response, it is that ~~Magical Money Tree~~ Modern Monetary Theory is a failed concept of how to run policy. This poet’s fervent hope is that Treasury Secretary Bessent is smart enough to understand that and will address fiscal issues in other manners. I believe that to be the case.

Back to the UK, where CPI printed at 3.0%, 2 ticks higher than the median forecast, while core CPI printed at 3.7%. This cannot be comforting for the BOE as most of the MPC remain committed to helping PM Starmer’s government find growth somehow and are keen to cut rates in support. The problem they have is that inflation will not fade despite extremely lackluster GDP growth. Recall, last week, even though the Q/Q GDP print of 0.1% beat forecasts, it was still just 0.1%. Not falling into recession hardly seems a resounding victory for policy in the UK, especially since stagnation, or is it now stagflation, is the end result. It should be no surprise that market participants have sold off the pound (-0.3%), Gilts (+5bps) and UK equities (-0.4%) and it is hard to find a positive way to spin any of this. Again, while I have adjusted my views on Japan, the UK falls squarely in the camp of in trouble and likely to see a weaker currency.

Ok, let’s look elsewhere to see how things behaved overnight. After a very modest rise in US equity indices yesterday, the Asian markets were mixed with the Nikkei (-0.3%) and Hang Seng (-0.15%) slacking off a bit although the CSI 300 (+0.7%) managed to find buyers after President Xi met with business leaders and the expectation is for further government stimulus, as well as a reduction in regulations, to help support the economy. Australia (-0.7%) is still under pressure despite yesterday’s RBA rate cut as the post-meeting statement was quite hawkish, indicating caution is their approach for now given still sticky inflation. (Where have we heard that before?)

In Europe, the only color on the screen is red with declines of between -0.4% and -0.9% as investors seem to be taking some profits after a solid run in most of these markets. I guess the fact that European governments have been shown to be powerless in the world has not helped investor sentiment either as it appears these nations may be subject to more outside forces than they will be able to address adequately. Lastly, US futures are unchanged at this hour (7:40).

In the bond market, as per the table above, yields are higher across the board with Treasuries (+2bps) the best performer as virtually all European sovereign issues have seen yields rise between 5bps and 7bps. It simply appears that confidence in the Eurozone is slipping and demand for Eurozone assets is falling alongside that.

In the commodity markets, it should be no surprise that gold (+0.1%) continues to edge higher. The barbarous relic continues to find price support despite the fact that interest in gold, at least in Western economies, remains lackluster at best. There is much discussion now about an audit of the US’s gold reserves at Fort Knox and in the NY Fed, something that has not been performed since 1953. Not surprisingly, there are rumors that there is much less gold in storage than officially claimed (a little over 8 tons) and rumors that there is much more which has not been reported but was obtained via seizures throughout history. This story has legs as despite the lack of institutional interest in the US, it is picking up a retail following and we are seeing the punditry increasingly raise their price forecasts for the coming years. As to oil (+0.8%) it is higher again this morning but remains in a tight trading range with market technicians looking at the $70/bbl level as a key support to hold. A break there could well see a quick $5/bbl decline.

Finally, the dollar is modestly firmer this morning against most of its counterparts with most G10 currencies showing declines similar to the pound’s -0.2%, although the yen (+0.15%) is bucking that trend. However, versus its EMG counterparts, the dollar is having a much better day, rising vs. PLN (-0.9%), ZAR (-0.7%) and BRL (-0.5%) on various idiosyncratic stories. The zloty seems to be suffering from its proximity to Ukraine and the uncertainty with the future regarding a potential peace effort. The rand is falling after the FinMin delayed the budget speech as internal squabbling in the governing coalition seems to be preventing a coherent message while the real is under pressure as inflation remains above target and the central bank’s tighter policy has been negatively impacting growth in the economy.

On the data front, this morning brings Housing Starts (exp 1.4M) and Building Permits (1.46M) and then this afternoon we see the FOMC Minutes from the January meeting. That will be intensely parsed for a better understanding of what the committee is thinking. We do hear from Governor Jefferson after the market closes, but generally, the cautious stance remains the most popular commentary.

Has anything really changed? The market remains uncertain over Trump’s moves, the Fed remains on hold and cautious, and data shows that the economy continues to tick along nicely with price pressures unwilling to dissipate. I see no reason to abandon the dollar at this point.

Good luck

Adf

A Fifth Wheel

Posted on February 18, 2025 by fxpoet

Confusion is clearly what reigns
As even the punditry strains
To understand whether
Investors will tether
Their future to stocks or take gains

As there was no activity in the US financial markets yesterday, it seems there was time for analysts to consider the current situation and make pronouncements as to investor behavior. Ironically, we saw completely opposite conclusions from two major players. On the one hand, BofA posted the following chart showing that investors’ cash holdings are at 15-year lows, implying they remain fully invested and quite bullish.

Meanwhile, the WSJ this morning has a lead article on how bearish investors are, claiming they are the most bearish since November 2023 according to the American Association of Individual Investors. Apparently, 47.3% of investors surveyed believe stock prices will fall over the next 6 months.

So, which is it? Are investors bullish or bearish? To me this is a perfect description of the current situation. Everyone is overloaded with information, much of which is contradictory, and so having a coherent view has become extremely difficult. This is part and parcel of my view that the only thing we can clearly expect going forward is an increase in volatility. In fact, someone said that Donald Trump is the avatar of volatility, and I think that is such an apt description. Wherever he goes, mayhem follows. Now, I also believe that people knew what they were voting for as change was in demand. But for those of us who pay close attention to financial markets, it will take quite the effort to keep up with all the twists and turns.

Fed speakers are starting to feel
Like they have become a fifth wheel
So, let’s get prepared
For Fed speaking squared
As they work, their views, to reveal

Away from the conundrum above, the other noteworthy thing is that FOMC members are starting to feel left out of the conversation. Prior to President Trump’s inauguration, market practitioners hung on their every word, and they apparently loved the power that came with that setting. However, now virtually every story is about the President and his policies with monetary policy falling to a distant issue on almost all scorecards. Clearly, for a group that had grown accustomed to moving markets with their words, this situation has been deemed unacceptable. The solution, naturally, is to speak even more frequently, and I ~~fear~~ believe this is what we are going to see (or hear) going forward.

Yesterday was a perfect example, where not only, on a holiday, did we have multiple speakers, but they actually proffered different messages. From the hawkish side of the spectrum, Governor Michelle Bowman, the lone dissenter to the initial 50bp rate cut back in September, explained caution was the watchword when it comes to acting alongside President Trump’s mooted tariff and other policies, “It will be very important to have a better sense of these policies, how they will be implemented, and establish greater confidence about how the economy will respond in the coming weeks and months.” That does not sound like someone ready to cut rates anytime soon.

Interestingly, from the dovish side of the spectrum, Governor Christopher Waller, an erstwhile hawk, explained in a speech in Australia (on the day the RBA cut rates by 25bps for their first cut of the cycle and ending an 18 month period of stable rates) that, “If this wintertime lull in progress [on inflation] is temporary, as it was last year, then further policy easing will be appropriate.” I find it quite interesting that Governor Waller suddenly sounds so dovish as many had ascribed to him the intellectual heft amongst the governors. This is especially so given that is not the message that Chairman Powell articulated either after the last meeting or at his Humphrey-Hawkins testimony recently.

So, which is it? Is the Fed staying hawkish or are they set for a turn? That will be the crux of many decision-making processes going forward, not just in markets but also in businesses. We will keep tabs going forward.

Ok, on to the market’s overnight performances. Lacking a US equity market to follow, everybody was on their own last night which showed with the mixed results. Japan (+0.25%) showed modest gains while the Hang Seng (+1.6%) rocketed higher on the belief that President Xi is going to be helping the economy, notably the tech firms in China, many of which are listed in Hong Kong. Alas, the CSI 300 (-0.9%) didn’t get that memo with investors apparently still concerned over the Trump tariff situation. Elsewhere in the region, Korea and Taiwan rallied while Australia lagged despite the rate cut. In Europe, unchanged is the story of the day with most bourses just +/-0.1% different than yesterday’s close. Right now, in Europe, the politicians are trying to figure out how to respond to the recent indication that the US is far less interested in Europe than in the past, and not paying close attention to financial issues. As to the US, futures at this hour (7:25) are pointing higher with the NASDAQ leading the way, +0.5%.

In the bond market, yields are climbing led by Treasuries (+4bps) with most of Europe seeing yields edge higher by 1bp or 2bps as well. Remember, yesterday European sovereign yields rose smartly across the board. Also, I must note JGB yields (+4bps) which have made further new highs for the move and continue to rise. It appears last night’s catalyst was a former BOJ member, Hiroshi Nakaso, explained he felt more rate hikes were coming with the terminal rate likely to be well above 1.0%. While I believe the Fed will be cautious going forward, I still think they are focused on rate cuts for now. With that in mind and the ongoing change in Japanese policy, I am increasingly comfortable with my new stance on the yen.

In the commodity markets, last Friday’s sell-off in the metals markets is just a bad memory with gold (+0.5%) rallying again and up more than 1% since Friday’s close. I continue to believe those moves were positional and not fundamental. Too, we are seeing gains in silver (+0.2%) and copper (+0.6%) to complete the triad. Meanwhile, oil (-0.25%) continues to lag, holding above its recent lows but having a great deal of difficulty finding any buying impulse. Whether that is due to a potential peace in Ukraine and the end of sanctions on Russian oil, or concerns over demand growth going forward is not clear to me, but the trend, as seen in the chart below, is clearly downward and has been so for the past year.

Source: tradingeconomics.com

Finally, in the FX markets, the dollar is firmer this morning rising against all its G10 counterparts with NZD (-0.6%) the laggard. But losses of -0.2% are the norm this morning. In the EMG bloc, we are seeing similar price behavior in most markets although MXN (+0.2%) is bucking the trend, seemingly benefitting from what appears to be a hawkish stance by Banxico and the still highly elevated interest rate differential in the peso’s favor.

On the data front, Empire State Manufacturing (exp -1.0) is the only data point although we will hear from two more Fed speakers, Daly and Barr. I cannot believe that they have really changed their tune and expect that caution will remain their guiding principle for now, although I expect to hear that repeated ad nauseum as they try to regain their place in the spotlight.

Aside from my yen view, I still find it hard to be excited about many other currencies for now. There is still no indication the Fed is going to move anytime soon, and other central banks are clearly in easing mode. That bodes well for the dollar going forward.

Good luck

Adf

Soaring Like Eagles

Posted on February 17, 2025 by fxpoet

Soaring like eagles
Japanese growth beats forecasts
Are rate hikes coming?

On this President’s Day holiday, when US markets are closed, arguably the most interesting financial story around is in the Land of the Rising Sun where Q4 GDP was released last night at 0.7%, significantly higher than forecast (0.2%) and Q3’s outcome (0.4%). Japanese markets responded about as might be expected with the yen (+0.6%) rising alongside JGB yields (+3bps) with the 10yr now at 1.38%, its highest level since March 2010. As to equity markets, the Nikkei (+0.1%) was caught between the positive GDP news and the stronger JPY. Of course, much has been made of the BOJ’s overnight rate, which now sits at 0.50% after several hikes during the past year. As well, expectations are for further hikes this year, with several analysts calling for a rate over 1.00% before the end of 2025.

But let us consider, for a moment, what the Japanese rate structure looks like in the context of the current inflation story in Japan. As can be seen below, this is the current shape of the Japanese government bond yield curve, with 2yr yields at 0.80% while 30yr yields are up to 2.30%.

Source: Bloomberg.com

However, when looking at these yields, which as you can see from the column furthest to the right have risen substantially in the past 12 months, we must also remember the pace of inflation in Japan. Since April 2022, every monthly CPI print in Japan has been above the target of 2.0%, with all but two of them above 2.5%. In fact, as you can see from the chart below, the most recent data, as of December 2024 with the January data to be released Thursday night, shows the headline at 3.6%. That is nearly three years of inflation data running above their target, yet the BOJ is unwilling to say inflation is stably at 2.0%. I guess they are correct, it is stably at about 3.0%!

Source: tradingeconomics.com

But let’s add up this conundrum and perhaps we will better understand why GDP is growing so robustly in Japan. If 10yr JGB yields are 1.38% and inflation is 3.60%, then real yields are running at… -2.22%. That is a pretty loose monetary policy and one in which it is no surprise that economic activity is humming along. In fact, unless we see a substantial decline in inflation, with no indication that is on the horizon, the BOJ has ample room to raise interest rates while maintaining accommodative monetary policy.

I know that there is much discussion regarding President Trump’s tariffs and whether Japan will be affected like other nations thus increasing uncertainty. But the economic reality is that the BOJ remains highly stimulative to the economy which has been a driver of both economic growth and inflation. I also know that this poet has been negative on the yen for a long time, in fact calling for USDJPY to reach 170 by the end of the year. But as I observe the current situation, take into account the fact that President Trump very clearly wants the dollar to decline, and see more hints that the Japanese government is becoming more concerned over rising inflation in Japan, I am changing my tune here. Add to these indications the fact that the yen, on any accounting, remains significantly undervalued, with estimates of as much as 50% (Big Mac Index claims it is 44% undervalued) and the case for yen strength is growing on me.

While over the past year, the yen has, net, done very little, the more recent trend is for yen strength as per the 1-month chart below. My take is that we need to see a break below 150 before the fireworks start, but if that is the case, do not be surprised if we trade back to 130 before the year is over.

Source tradingeconomics.com

And really, that is the story of the evening. The Chinese NPC will be meeting next week to discuss their economic plans and policies for the upcoming year, so that will be important. As well, Europe has been put on notice by recent speeches from VP JD Vance and Secretary of State Marco Rubio that the relationship with the US is changing. However, at this time, it is very difficult to discern if that means the euro will weaken further or rebound on increased internal activity.

Ok, let’s look at markets overnight. It appears that with the US on holiday, many markets were reluctant to demonstrate leadership in any direction with not only Tokyo virtually unchanged, but the same being true throughout Asia (Hong Kong, 0.0%, China +0.2%, Australia -0.2%) and most of Europe with only the German DAX (+0.8%) showing any life at all. It seems that several German defense contractors are benefitting from the idea that Europe may be increasing its defense expenditures locally. US futures are little changed, although of course the market will not be open today.

Treasury bonds are also unchanged this morning with no trading but in Europe, yields are higher by between 3bps and 5bps, also on the rising defense expenditure story as there is an idea now floating around that there will be pan-European debt issuance to help fund that expenditure, thus adding supply to the market. Certainly, despite the ECB maintaining a somewhat dovish stance, if European yields climb higher, that will likely support the single currency.

In the commodity markets, after Friday’s rout in the metals, where both precious and industrial metals sold off sharply, seemingly on no news, but more likely on position adjustments, this morning we are seeing a rebound, at least in gold (+0.5%) and silver (+0.6%) although copper (-1.3%) remains under pressure. As to energy prices, oil (-0.35%) is continuing to hover closer to the bottom than top of its recent trading range as there is no clarity at all regarding how a potential Ukrainian peace will impact Russian production. The one consistency is that European NatGas continues to decline on hopes that Russian gas deliveries will resume going forward.

Finally, the dollar is doing mixed this morning with the yen the outlier showing strength against the greenback, but ZAR (-0.5%) and MXN (-0.4%) showing weakness. The rest of the G10 has seen only modest movement and that is generally true for the rest of the EMG bloc. Traders remain highly uncertain over the future that President Trump will usher in.

On the data front, it is a pretty light calendar overall.

Tuesday	Empire State Manufacturing	0.0
Wednesday	Housing Starts	1.4M
	Building Permits	1.46M
	FOMC Minutes
Thursday	Initial Claims	215K
	Continuing Claims	1860K
	Philly Fed	16.3
	Leading Indicators	-0.1%
Friday	Flash Manufcturing PMI	51.2
	Flash Services PMI	53.2
	Existing Home Sales	4.13M
	Michigan Sentiment	67.8

Source: tradingeconomics.com

As well as this data, we see the EIA oil inventories and hear from 11 more Fed speakers. But again, after Powell made clear they are on hold for now, and there has been no data to change that perception, and President Trump continues to dominate the spotlight, I don’t anticipate any new information here.

With the holiday today, I anticipate things will be quite slow. Traders will take advantage of the time off to rest given the rising volatility we have seen. Going forward, I will be reevaluating my longer-term views based potential changes in fiscal policies around the world. But for now, other than the yen, I don’t see any clear changes yet.

Good luck

Adf

Having a Fit

Posted on February 14, 2025 by fxpoet

Seems Europe is having a fit
‘Cause Putin and Trump may submit
A plan for the peace
Where there’s an increase
In spending the Euros commit

Remarkably, though peace would seem
The basis of many a dream
Seems many despise
The fact that these guys
Don’t care Europe can’t stand this scheme

Here’s the thing about President Trump, you never know what he is going to do and how it is going to impact market behavior. A case in point is the growing momentum for further peace negotiations between the US and Russia, with Ukraine basically going to be told how things are going to wind up. On the one hand, you can understand Ukraine’s discomfort as they don’t feel like they are getting much say in the matter. On the other hand, it seemed increasingly clear that the end game, if there is no US intervention of this nature, would be for Russia to bleed Ukraine of its fighting age population while systematically destroying its infrastructure.

The thing I find most remarkable is the number of pundits who hate this outcome despite the end result of the cessation of the fighting and destruction. After three years of conflict, and with other nations willing to allow Ukrainians to die on the front lines while they preened about saving democracy, there was no serious push to find a solution. I have no strong opinion on the terms that have been floated thus far, and I don’t believe rewarding a nation for aggressive action is the best outcome, but Russia has proven throughout history that they are willing to sacrifice millions of their own citizens in warfare, and the case for a Ukrainian victory seemed remote at best. As experienced traders well understand, sometimes you have to cut your position so you can focus on something else. Seems like a good time to cut the positions here.

Speaking of positions, let us consider what peace in Europe may mean for financial markets. Yesterday I discussed how European NatGas prices have more than doubled since the war began. If they return to their pre-war levels, that dramatically enhances Europe’s economic prospects, despite their ongoing climate policies. Clearly, the FX market got that memo as the euro has rallied back to its highest level since December 2024 save for a one-day spike just after Trump’s inauguration. In fact, it is not hard to look at the chart below and see a bottom forming in the single currency. While the moving average I have included is only a short-term, 5-day version, you have to start somewhere. While the fundamentals still seem to point to further downside in the single currency, between the Fed’s pause and more hawkish stance opposite the ECB’s ongoing policy ease, the medium-term picture could be far better for the Europeans. If the war truly does end, it would likely see a significant uptick in investment and economic activity as they seek to rebuild Ukraine, and we could see substantial capital flows into the European economies.

Source: tradingeconomics.com

As well, oil prices, continue to trade near the bottom of their recent trading range as the working assumption seems to be that with a peace treaty, Russian oil would no longer be sanctioned, enhancing global supplies. A look at the trend line in the chart below seems to indicate that is the direction of the future.

Source: tradingeconomics.com

The other remarkable thing is the decline in yields, where yesterday, despite a very hot PPI number, which followed Wednesday’s hot CPI number, Treasury yields fell back 7bps. While there are likely some other aspects to this move, notably the ongoing story regarding DOGE and the attack on waste and fraud in the US, yesterday’s move was not indicative of fear, rather I read it as a positive sign that investors are betting on a chance that President Trump can be successful with respect to reducing the massive overspending by the government. Clearly, this is early days regarding President Trump’s ability to get a handle on spending, and it could all blow up as legislative compromises may significantly water down any benefits, but I contend the market is showing hope right now, not fear.

And that, I would contend, is the big underlying driver of markets right now. The prospects for peace and the potential impacts are the focus. While tariffs are still a big deal, and yesterday’s talk about reciprocal tariffs is simply the latest in a long line of these discussions and pronouncements, the market seems to be getting tired of that conversation. If we recap the current situation, central bank activities have lost their importance amid a huge uptick in governmental actions, both fiscal and geopolitical. In many ways, I think this is great, the less central bank, the better.

Ok, let’s see how markets continue to absorb these daily haymakers from President Trump and the responses from other governments. Clearly, the US equity market remains far more fixated on Trump’s actions than on higher inflation potentially forcing the Fed to raise rates. In fact, despite the hot PPI print, the futures market has actually increased its expectation for rate cuts this year to 35bps. That doesn’t make sense to me, but I’m just an FX poet.

If we turn to Asian markets, Hong Kong (+3.7%) was the big winner overnight as a combination of growing expectations for more Chinese government stimulus to be announced soon, along with the ongoing tech positivity in the wake of the DeepSeek announcement got investors excited. On the mainland, shares (CSI 300 +0.9%) were also higher, but not as frothy. Meanwhile, the weaker dollar hindered the Nikkei (-0.8%) as the yen has gained 1.3% since the CPI data on Wednesday. In Europe, the picture is mixed with the CAC (+0.4%) the best performer and the DAX (-0.4%) the worst performer. Eurozone GDP surprised on the upside in Q4, growing…0.1%!! Talk about an explosive economy. However, that was better than forecast and helped avoid a recession. The interesting thing about European equity markets, though, is that despite a dismal economic backdrop, most major markets are trading at or near all-time highs. Further proof that the market is not the economy. As to US futures, ahead of this morning’s Retail Sales data, they are flat.

After several days of substantial movement in the bond market, it seems that traders have taken a long weekend given the virtual absence of movement here. Treasury yields are unchanged on the day and European sovereign yields are higher by 1bp.

In the commodity markets, on the day, oil prices are unchanged, although as per the above chart, it appears the trend is lower. US NatGas (+1.8%) is rallying on forecasts for another cold spell, but European NatGas (-4.85%) continues to fall as prospects for peace indicate new supplies, or perhaps, renewed supplies. In the metals markets, gold (+0.15%) is continuing its positive momentum but the big mover today is silver (+2.7%) which seems to be responding to some large option expirations in the SLV ETF (h/t Alyosha) which seem set to drive substantial demand for delivery.

Finally, the dollar remains under pressure overall, although the movement has generally not been that large today. The big outlier in the G10 is NZD (+0.9%) which has responded to the delay in the reciprocal tariff implementation until April. Elsewhere in this bloc, gains are universal, but modest with movement between just 0.1% and 0.2%. In the EMG bloc, the dollar is also under pressure with ZAR (+0.65%) a major gainer as precious metals continue to be in demand. CLP (+1.15%) is also continuing to benefit from copper’s ongoing rally. The exception to this movement has been Asia where most regional currencies are modestly softer this morning, KRW, TWD, INR, as the tariff talks still seem to be the driving force in these markets.

On the data front, we finish the week with Retail Sales (exp -0.1%, +0.3% ex autos), then IP (0.3%) and Capacity Utilization (77.7%). Yesterday’s PPI data was several ticks hotter than forecast and seems to put paid to the idea that inflation is heading back to the Fed’s target. This afternoon we hear from Dallas Fed president Lorrie Logan, but again, it is hard to make the case that the Fed is the driver of anything right now.

Fundamentals still point to dollar strength, I would argue, but the market is not paying attention. Rather peace and the peace dividend are now the driver in the FX markets and to me, that implies we are set to see the dollar give back some of its gains from the past 6 months.

Good luck and good weekend

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Shattered His Dreams

Posted on February 13, 2025 by fxpoet

The data was hot yesterday
And that put the pressure on Jay
It shattered his dreams
‘Bout all of his schemes
To help keep inflation at bay

By now, I am sure you are aware that the CPI data was higher than forecast, and certainly higher than would have made Chairman Powell comfortable. The outcome, showing Headline rising to 3.0% and core rising to 3.3% with correspondingly higher monthly rises was sufficient to alter the narrative at least a little bit. Chair Powell even mentioned it in his House testimony, noting, “We are close, but not there on inflation…. So, we want to keep policy restrictive for now.” Essentially, the data makes clear that the Fed is not going to be cutting the Fed funds rate anytime soon. The futures market got the message as it is now pricing just 29bps of cuts this year, with December the likely date.

It will be no surprise that the stock market’s initial response was to sell off substantially, but as per the chart below, it spent the rest of the day clawing back the losses and wound up little changed on the day. This morning, it remains basically unchanged as well.

Source: tradingeconomics.com

Treasury bonds, though, had a less fruitful session, falling (yields rising) sharply on the print, but never really regaining their footing with yields jumping almost 15bps at one point although finishing the day about 10bps higher and have given back 2bps more this morning.

Source: tradingeconomics.com

Now, we all know that the Fed doesn’t target CPI, but rather PCE. However, after this morning’s PPI data release, most economists (although not poets) will be able to reasonably accurately estimate that data point for later this month, as will the Fed. And that number is not going to be moving closer to their 2.0% target. What seems very clear at this point is that every Fed speaker for the time being is going to be harping on the caution with which they are going to move forward.

If we look at this from a political perspective, something which is unavoidable these days, it is important to remember that Treasury Secretary Bessent has made clear that he and the president are far more focused on the 10-year yield than on the Fed funds rate. To that end and given the fact that all this data was from a time preceding President Trump’s inauguration, I don’t think they are too worried. I would look for the President to continue his drive to reduce waste and fraud in the government and attack that deficit. Certainly, the news to date is there is a great deal of both waste and fraud to reduce, and if the president is successful, I believe that will play out in significantly lower 10-year yields, if for no other reason than the deficit is reduced or closed. This story is just beginning to be written.

Now, Putin and Trump had a call
As Trump tries to end Russia’s brawl
They’re slated to meet
So, they can complete
A treaty with Europe awol

Under any interpretation, I believe the news that Presidents Trump and Putin are going to meet in an effort to hammer out an end to the Russia/Ukraine war is good news. Beyond the simple fact that less war is an unadulterated good, I think it is very clear that this particular war has had significant market impacts, hence our interest here. Obviously, energy prices have been impacted, as both oil and NatGas prices are higher than they would otherwise be given the removal of some portion of Russia’s exports from the global markets and economy. As such, the end of this conflict, with one likely consequence being Western Europe reopening themselves to Russian energy imports, is likely to see prices decline.

This matters for more reasons than the fact it will be cheaper to fill up your tank at the gas (petrol) station, it is very likely to have a very positive impact on inflation writ large. As you can see from the chart below, there is a very strong correlation between the price of oil and US inflation expectations. Declining oil prices are very likely to help people perceive a less inflationary future and will reduce the rate of inflation by definition.

Source: ISABELNET

Inflation is an insidious process, and once entrenched is very hard to reduce, just ask Chairman Powell. I also know that there has been much scoffing at President Trump’s claims he will reduce inflation, especially with his imposition of tariffs all over the place. (It is important to understand that tariffs are not necessarily inflationary by themselves as well explained by my friend the Inflation guy in this article.). However, between his strong start on reducing government expenditures and the potential for an end to the Russia/Ukraine war leading to lower energy prices, these are longer term effects that may do just that.

Ok, let’s move on to the market activities in the wake of yesterday’s CPI and ahead of this morning’s PPI data. As discussed above, yesterday’s US markets rebounded from their worst levels of the morning and closed modestly lower with the NASDAQ actually unchanged. In Asia, Japanese shares (+1.3%) had a solid day as the weak yen helped things along although Chinese shares (HK -0.2%, CSI 300 -0.4%) did not fare as well on the day with tariffs still top of mind. Elsewhere in the region, other than Korea (+1.4%) movement was mixed and modest. In Europe, the possibility of peace breaking out in Ukraine has clearly got investors excited as both Germany (+1.5%) and France (+1.2%) are seeing strong inflows. The UK (-0.7%) however, continues to suffer from economic underperformance with no discernible benefits shown from the governments weak efforts to right the ship. GDP was released this morning and while they avoided recession, it’s very hard to get excited over 0.1% Q/Q growth. As to the US futures market, at this hour (7:20), they are essentially unchanged.

In the bond market, we’ve already discussed Treasury yields, but another benefit of the prospects for a Ukrainian peace is that sovereign yields have fallen substantially, between -5bps and -8bps, throughout the continent. Once again, the impact of that phone call between Trump and Putin has been quite significant. Consider that not only are energy prices likely to slide, but the required government spending to prosecute the war is likely to diminish as well.

In the commodity markets, it should be no surprise that oil (-1.3%) prices are sliding as are NatGas prices in Europe (TTF -7.5%) as the opportunity for cheap Russian gas to flow to Europe is once again in view. To highlight the impact that this has had on Europe, prior to the Ukraine war and the halting of gas flows, the TTF contract hovered between €5 and €25 per MWh. Since the war broke out, even after the initial shock, it has been between €25 and €55 per MWh. This is all you need to know about why Europe, and Germany especially, is deindustrializing. As to the metals markets, after a few days of consolidation, gold (+0.4%) is on the move again although it has not yet recaptured the highs seen early Tuesday morning. Give it time. Copper (+0.6%), too, is back on the move and indicating that economic activity is set to continue to grow.

Finally, the dollar is mixed this morning, although arguably a touch softer overall, as the Russia news has traders looking for less negativity in Europe. So modest gains in the euro and pound, about 0.15% each is offsetting larger losses in AUD (-0.3%) and NZD (-0.6%), although given the much smaller market size of the latter two, they matter much less. JPY (+0.4%) is rebounding after yesterday’s sharp decline on the back of the jump in Treasury yields, and it is noteworthy that CHF (+0.65%) is gaining after its CPI data showed a decline in prices last month. In the EMG bloc, CLP (+0.7%) is stronger on that copper rally, while ZAR (+0.1%) seems to be edging higher as gold continues to perform well. MXN (-0.4%) though is still struggling with the potential negative impact of tariffs and otherwise, there is not much to report.

This morning brings PPI (exp 0.3%. 3.3% Y/Y headline; 0.3%, 3.5% Y/Y core) as well as the weekly Initial (215K) and Continuing (1880K) Claims data. There are no Fed speakers on the docket, but at this point, I expect the Fed will be fading into the background since they are clearly on hold and President Trump commands the spotlight. Unless the data starts to veer dramatically away from what we have seen, it appears that the market is going to continue to respond to Trumpian headlines, which of course are impossible to predict. But remember, most of the rest of the world is still in cutting mode so the dollar should continue to hold its own.

Good luck

Adf

Not in a Rush

Posted on February 12, 2025 by fxpoet

Said Powell, we’re not in a rush
To cut rates as we try to crush
Remaining inflation
And feel the sensation
Of drawing an inside straight flush

Up next is the CPI data
Though not one on which we fixate-a
The surveys explain
That people remain
Quite certain that we’re doing great-a

Chairman Powell testified to the Senate Banking Committee yesterday and the key comments were as follows, “Inflation has eased significantly over the past two years but remains somewhat elevated relative to our 2 percent longer-run goal. Total personal consumption expenditures (PCE) prices rose 2.6 percent over the 12 months ending in December, and, excluding the volatile food and energy categories, core PCE prices rose 2.8 percent. Longer-term inflation expectations appear to remain well anchored, as reflected in a broad range of surveys of households, businesses, and forecasters, as well as measures from financial markets.” [Emphasis added.] He followed up, “With our policy stance now significantly less restrictive than it had been and the economy remaining strong, we do not need to be in a hurry to adjust our policy stance. We know that reducing policy restraint too fast or too much could hinder progress on inflation.” This is largely what was expected as virtually every Fed speaker since the last FOMC meeting has said the same thing, there is no rush to further cut rates. Powell did admit that the neutral rate had risen compared to where it was before inflation took off in 2022 but maintains that current policy is still restrictive.

However, let’s examine the highlighted comment above a little more closely. Two things belie that statement as wishful thinking rather than an accurate representation of the current situation. The first is that the most recent survey released from Friday’s Michigan Sentiment surveys, shows that inflation expectations for the next year jumped dramatically, one full percent to 4.3% as per the below chart.

Source: tradingeconomics.com

Looking over the past 10 years of data, that is a pretty disturbing spike, taking us right back to the 2022-23 period when inflation was roaring. In addition to that little jump, it is worth looking at those market measures that Powell frequently mentions. Typically, they are either the 5-year or 10-year breakeven rate. That rate is the difference between the 5-year Treasury yield and the 5-year TIPS yield (or correspondingly the 10-year yields). A quick look at the chart below shows that since the Fed first cut rates in September 2024, the 5-year breakeven rate has risen 78bps to 2.64%. Certainly, looking at the chart, the idea of ‘well anchored’ isn’t the first description I would apply. Perhaps, rocketing higher?

At any rate, it appears quite clear that the Fed is on hold for a while yet as they await both the evolution of the economy and further clarity on President Trump’s policies on tariffs. While there is no doubt that we will continue to hear from various Fed speakers going forward, I maintain that the Fed is not seen as the primary driver in markets right now, rather that is President Trump.

Of course, data will still play a role, just a lesser one I believe, but we cannot ignore the CPI report due this morning. First, remember, the Fed doesn’t focus on CPI, but rather on PCE which is typically released at the end of the month and calculated by the Commerce Department, not the BLS. But the rest of us basically live in CPI land, so we all care. If nothing else, it gives us something to complain about as we look incredulously at the declining numbers despite what we see with our own eyes every time we go shopping.

As it is, here are this morning’s median expectations for the data, headline CPI (+0.3% M/M, 2.9% Y/Y) and core CPI (+0.3% M/M, 3.1% Y/Y). Once again, I believe there is value in taking a longer view of this data for two reasons; first to show that we are not remotely approaching the levels to which we became accustomed prior to the Covid pandemic and government response, and second to highlight that if your null hypothesis is CPI continues to decline, that may not be an appropriate view as we have spent the past 8 months in largely the same place as per the below chart. Too, note the similarity between the Michigan Survey chart above and this one.

Source: tradingeconomics.com

OK, those are really the stories of the day since there have not, yet, been any new tariffs imposed by President Trump, and traders need to focus on something. Let’s take a look at how things behaved overnight.

After a mixed US equity session, the strength was in Hong Kong (+2.6%) and China (+1.0%), seemingly on the back of several stories. First is that China is looking at new ways to address the property bubble’s implosion, potentially allocating more support there, as well as this being a reflexive bounce from yesterday’s decline and the story that President’s Xi and Trump have spoken with the hope that things will not get out of hand there. As to Japan, the Nikkei (+0.4%) has edged higher as the yen (-0.7%), despite a lot of talk about higher rates in Japan and the currency being massively undervalued, continues to weaken. In Europe, once again there is limited movement overall with very tiny gains of less than 0.2% the norm although Spain’s IBEX (+0.7%) is the big winner today on some positive earnings results. US futures are little changed at this hour (7:15).

In the bond market, Treasury yields are unchanged this morning, retaining the 4bps they added yesterday, and in Europe, sovereign yields are also little changed with German Bunds (+2bps) the biggest mover in the session. JGB yields did rise 3bps overnight, but that seems to be following US yields as there was precious little new news there.

In the commodity markets, yesterday’s metal market declines are mostly continuing this morning with gold (-0.6%) down again, although still hanging around $2900/oz. Silver has slipped although copper (+0.3%) has arrested its decline. Oil (-1.1%) is giving back some of yesterday’s gains and continues to trade in the middle of its trading range with no real direction. One thing I haven’t highlighted lately is European TTF NatGas prices, which while softer this morning (-1.9%) have risen 15% in the past month as storage levels in Europe are declining to concerning levels and global warming has not resulted in enough warm days for the winter.

Finally, the dollar is mixed away from the yen’s sharp decline with the euro (+0.1%) and CHF (+0.2%) offsetting the AUD (-0.3%) and NOK (-0.5%). It is interesting that many of the financial and trading accounts that I follow on X (nee Twitter) continue to point to JPY and CAD as critical and are anticipating strength in both those currencies imminently. And yet, neither one is showing much tendency to strengthen, at least for the past month or two. I guess we shall see, but if the Fed is going to remain on hold, and especially if more tariffs are coming, I suspect the default direction of the dollar will be higher. As to the EMG bloc, there is virtually nothing happening here, with a mix of gainers and laggards, none of which have moved 0.2% in either direction.

Other than the CPI data, Chairman Powell testifies to the House Financial Services Committee, and we will see EIA oil inventories with a modest build anticipated. We also hear from two other Fed speakers, but again, with Powell in the spotlight, they just don’t matter.

Markets overall are pretty quiet, seemingly waiting for the next shoe to drop. My money is on that shoe coming from the Oval Office, not data or Powell, which means we have no idea what will happen. Stay hedged, but until further notice, I still don’t see a strong case for the dollar to decline.

Good luck

Adf

Norms to Eschew

Posted on February 11, 2025 by fxpoet

For market practitioners, Trump
Is more than a modest speed bump
His willingness to
Most norms to eschew
Can force long-term views to go bump

Meanwhile, as the markets prepare
For Powell to sit in his chair
In front of the Senate
A popular tenet
Is more rate cuts he will foreswear

It is very difficult to keep up with the news these days as President Trump really does address so many disparate issues in such short order, it is hard to know which ones will potentially impact markets and which will simply be headline fodder. Obviously, the tariff discussions remain front and center, but even those plans seem to be evolving at a very fast pace, and while yesterday he did invoke 25% tariffs on steel and aluminum imports, that has literally become old news already. The next question is what will occur with the latest idea of reciprocal tariffs, where the US will charge the same tariff on imports from other nations as those nations charge on imports from the US.

Generally speaking, US tariffs are the lowest overall around the world, which arguably is exactly what Trump wants to address. I am not going to argue the merits or detractions of tariffs, that is pointless. The only thing to consider is if they are implemented, what are the potential impacts. One of the key things to remember about the effectiveness of tariffs is the price elasticity of the products being tariffed. If, for instance, a product has substantial competition and is easily replaced, the nation being tariffed is likely going to absorb the bulk of the pain. Consider Colombia and how quickly they caved regarding the deportations. While I am not a coffee drinker, and I am sure there are those who believe Colombian coffee is the best, coffee also comes from Brazil, Vietnam, Hawaii and Indonesia, and as none of those nations (and obviously Hawaii) were subject to tariffs, Colombia would have paid the freight had they been implemented.

But, for a product like solar panels, where there are few suppliers other than the Chinese, to the extent the demand remained in place, the purchaser would see higher prices. Turning to steel and aluminum, the below graphic shows the top 10 global steel producing nations and how much they produced in 2024. This graphic says all you need to know about why President Trump is unhappy with China and their trade policies. (well, this and the next one)

Source: worldsteel.org

And while this is not an exact apples-to-apples comparison, the below chart shows forecasts for steed demand in 2023 and 2024. The mismatches are clear as China, South Korea and Japan have a significant surplus to export while the US and India need imports.

Source: mrssteel.com.vn

The point is President Trump is seeking to address that imbalance and is of the mind that the US would be better off if we make our own steel. In fact, this is simply part of his entire philosophy to reshore US manufacturing capabilities.

Now, steel is a traded commodity, although in financial markets, not so much. But changes in the flows of imports and exports will have an impact on FX markets, while tariffs could well also impact investment flows. In fact, it is not hard to see why Nippon Steel wants to buy US Steel. if they own a steel manufacturer in the US, they can increase production with no concerns over tariffs.

Remember, too, this issue is merely a microcosm of the potential chaos that will be seen across industries and nations, both of which will impact financial markets. Once again, I harp on the idea that a robust hedging program is a necessity these days.

Turning to today’s activities, Chairman Powell will be testifying before the Senate Banking Committee this morning. On the one hand, I wonder if he is upset by the fact that virtually nobody is concerned about what he says these days as Trump continues to dominate every conversation. For someone who has become quite accustomed to being the center of attention with respect to markets, this may well be a blow to his vanity and ego. On the other hand, it is also quite possible that maintaining a low profile is precisely his strategy here, and if that is the case, I expect we will not learn anything new at all. The Fed mantra is currently that they will be cautious before implementing any further rate cuts. Remember, CPI is released tomorrow as well, so when he goes before the House, they will have that information in hand. But to Powell’s benefit, Treasury Secretary Bessent made clear he and President Trump are far more concerned about the 10-year yield than Fed funds. This may be the most amazing transformation of all, a Fed chair who becomes a wallflower!

Ok, after yesterday’s US equity rally, the story in Asia was far less positive. Japan and Australia were unchanged while the Hang Seng (-1.1%) and CSI 300 (-0.5%) both suffered, perhaps on the tariff impositions. Elsewhere in the region, Taiwan and South Korea both had solid sessions while weakness was evident in Indonesia, India and the Philippines. In fact, all three of those markets have been declining steadily since October, with declines between 15% and 20% as prospects in those economies seem concerning, especially with Trump’s tariff mania. In Europe, virtually every market is unchanged this morning as the EU quickly explained they would retaliate against any US tariffs. Of course, that is what makes Trump’s reciprocal tariff structure so interesting. How can Europe complain that other nations impose the same level of tariffs they do? Meanwhile, at this hour (7:05), US futures are pointing slightly lower, about -0.25%.

In the bond market, yields are climbing with Treasuries higher by 3bps, now 12bps above the lows seen early last week, while in Europe, yields are substantially higher, with France (+10bps) leading the way, but the rest of the continent showing rises of between 4bps and 6bps. Part of this move on the continent is driven by a catch up to yesterday afternoon’s US yield rally. As to the French, seemingly their Unemployment Report, which showed a much better than expected 7.3%, may have investors concerned about quickening growth and inflation. That feels like a lot, but there are no real explanations I have seen.

In the commodity markets, oil (+1.5%) is continuing to rebound off its recent lows, although still looks like it is in the middle of its trading range. Gold (-0.7%) and silver (-1.2%) are both finally retracing some of the extraordinary rally that we have been witnessing for the past two months. Copper (-2.7%), too, is under pressure this morning, unwinding some of its recent spectacular gains.

Finally, the dollar is very modestly softer, but not universally so. For instance, the euro (+0.2%) and yen (-0.2%) seem to offset each other while most other G10 currencies have moved even less. In the EMG bloc, though, INR (+0.9%) is the biggest gainer as the RBI has been intervening to address what had been an acceleration in the rupees decline in the past few weeks (see below).

Source: tradingeconomics.com

Elsewhere in the space, gains are less impressive, with moves on the order of +0.4% (PLN and HUF) or smaller.

On the data front, the NFIB Small Business Optimism Index was released at a softer than expected 102.8 as it seems the Trumpian chaos is having an effect for now. Otherwise, the only thing is Powell and three other Fed speakers, but again, given the relative lack of discussion regarding Powell, the other three will get even less press in my view.

It is difficult to claim nothing has changed lately, but perhaps more accurately, there is no clear directional change at this point. We need to start seeing some consistency in the policy impacts and that is likely to take months. Until then, volatility is the watchword across all markets.

Good luck

Adf

Loathing and Fear

Posted on February 10, 2025 by fxpoet

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

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

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

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

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

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

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

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

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

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

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

Source: tradingeconomics.com

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

Source: tradingeconomics.com

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

Source: tradingeconomics.com

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

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

Source: tradingeconmics.com

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

Good luck

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Positioning’s Fraught

Posted on February 7, 2025 by fxpoet

The wonderful thing about Trump
Is traders no longer can pump
A market so high
That it can defy
Reality ere it goes bump

Since policies can change so fast
A long-term view just cannot last
So, Fed put or not
Positioning’s fraught
And larger ones won’t be amassed

As we await the NFP report this morning, I couldn’t help but ponder the uptick in complaints and concerns by traders that increased volatility in markets on the back of President Trump’s mercurial announcements has changed the trading game dramatically. Let me say up front that I think this is a much healthier place to be and explain why.

Pretty much since the GFC and, more importantly, then Chairman Bernanke’s first utilization of QE and forward guidance, the nature of financial markets had evolved into hugely leveraged one-sided views based on whatever the Fed was guiding. So, the initial idea behind QE and forward guidance was to assure all the traders and investors that make up the market that even though interest rates reached 0.0%, the Fed would continue to ease policy and would do so for as far out in time as you can imagine. Lower for longer became the mantra and every time there was a hiccup in the market, the Fed rushed in, added yet more liquidity to calm things down, and put the market back on track for further gains. This was true for both stocks and bonds, despite the fact that the Fed has no business or mandate involving the equity market.

This activity led to the ever-increasing size of trading firms as leverage was cheap and steadily rising securities prices led to lower volatility, both implied and real, in the markets. Risk managers were comfortable allowing these positions to grow as the calculated risks were minimized by the low vol. In fact, entire trading strategies were developed to take advantage of the situation with Risk Parity being a favorite.

However, a negative result of these actions by the Fed was that investors no longer considered the fundamentals or macroeconomics behind an investment, only the Fed’s stance. The only way to outperform was to take on more leverage than your competitors, and that was great while rates stayed at 0.0%. Alas, this persisted for so long that many, if not most, traders who learned the business prior to the GFC wound up retiring or leaving the market, and the next generation of traders and investors lived by two credos, number go up and BTFD.

The Fed remained complicit in this process as FOMC members evolved from background players to a constant presence in our daily lives, virtually preening on screens and in front of audiences and reiterating the Fed’s views of what they were going to do, implicitly telling traders that taking large, leveraged bets would be fine because the Fed had their back.

Of course, the pandemic upset that apple cart as the combination of Fed and government response imbued the economy with significantly more inflation than expected and forced the Fed to change their tune. The market was not prepared for that, hence the outcome in 2022 when both stocks and bonds fell sharply. But the Fed would not be denied and calmed things down and created a coherent enough message so that markets recovered the past two years. This has, naturally, led to increased position sizing and more leverage because that’s what this generation of traders understands and has worked.

Enter Donald J Trump as president, elected on a populist manifesto and despite his personal wealth, seemingly focused on Main Street, not Wall Street. The thing about President Trump is if an idea he proffers doesn’t work, he will drop it in a heartbeat and move on. As well, by wielding the full power of the United States when dealing in international situations, other nations can quickly find themselves in a difficult spot and, so far, have been willing to bend their knee. As well, his focus on tariffs as a primary weapon, with little regard for the impact on markets, and the way with which he uses them, threatening to impose them, and holding off at the last minute when other nations alter their policy, has kept markets off-balance.

The result is large leveraged positions are very difficult to hold and manage when markets can move up and down 2% in a day, every day (like the NASDAQ 100 chart below), depending on the headlines.

Source: tradingeconomics.com

The natural response is to reduce position size and leverage, and that, my friends, is a healthy turn in markets. This is not to say that there are not still many significant imbalances, just that as they continue to blow up, whether Nvidia, or FX or metals, my take is the next set of positions will be smaller as nimble is more important than large. It doesn’t matter how smart an algorithm is if there is no liquidity to adjust a position when the world changes. This poet’s opinion is this is a much healthier place for markets to live.

Ok, let’s see what happened overnight ahead of today’s data. Mixed is the best description as yesterday’s US closes saw a mixed outcome and overnight the Nikkei (-0.7%) fell while both Hong Kong (+1.2%) and China (+1.3%) gained ground. Korea and India slid, Taiwan rose, the picture was one of uncertainty about the future. That also describes Europe, where only Germany and Norway have managed any modest gains at all while the rest of the continent and the UK are all slightly lower. Apparently, yesterday’s BOE rate cut has not comforted investors in the UK, nor has the talk of more rate cuts by the ECB bolstered attitudes in Europe. As to US futures, at this hour (7:00) they are basically unchanged.

In the bond market, the biggest mover overnight was in Japan where JGB yields rose 3bps, once again touching that recent 30-year high. While some BOJ comments indicated inflation remained well-behaved, the market is clearly of the view that Ueda-san is getting set to hike rates further. In Europe, yields are basically lower by 1bp across the board and Treasury yields are unchanged on the session as investors and traders continue to focus on Treasury Secretary Bessent’s conversation that he cares about 10-year yields, not Fed funds. Perhaps the Fed will cut rates to recapture the spotlight they have grown to love.

Oil (+0.5%) prices continue to drift lower overall, although this morning they are bouncing from yesterday’s closing levels. Questions about sanctions policy on Iran, on Russia’s shadow fleet and about the state of the global economy and therefore oil demand remain unanswered. However, the fact that oil has been sliding tells me that there is some belief that President Trump may get his way regarding a desire for lower oil prices. In the metals markets, copper (+1.1%) is flying higher again, and seems to be telling us that the economy is in decent shape. Either that or there is a major supply shortage, although if that is the case, I have not seen any reporting on the subject. Both gold and silver are very modestly higher this morning after small declines yesterday as the London – NY arbitrage continues to be the hot topic and financing rates for both metals have gone parabolic.

Finally, the dollar is mixed this morning, perhaps slightly firmer as JPY (-0.5%) is actually the worst performer around, despite the rise in JGB yields. There is a lot of chatter on how the yen is due to trade much higher, and it has rallied over the past month, but it is certainly not a straight line move. As to the rest of the space, virtually every other currency is +/-0.2% from yesterday’s close with CLP (+0.5%) the lone exception as the Chilean peso benefits from copper’s huge rally.

On the data front, here are the latest expectations for this morning’s employment report:

Nonfarm Payrolls	170K
Private Payrolls	141K
Manufacturing Payrolls	-2K
Unemployment Rate	4.1%
Average Hourly Earnings	0.3% (3.8% Y/Y)
Average Weekly Hours	34.3
Participation Rate	62.5%
Michigan Sentiment	71.1

Source: tradingeconomics.com

Remember, though, the ADP number on Wednesday was much better than expected at 183K (exp 150K) with a major revision higher by 54K to the previous month). As well, this month brings the BLS adjustments for 2024 which will not be broken down, just lumped into the data. Recall, there are rumors of a significant reduction in the number of jobs created in 2024 as well as a significant increase in the population estimates with more complete immigration data, and that has led some pundits to call for a much higher Unemployment Rate. I have no insight into how those adjustments will play out although the idea they will be large seems highly plausible.

Ahead of the number, nothing will happen. If the number is strong, so NFP >200K, I expect that bonds will suffer, and the dollar will find some support. A weak number should bring the opposite, but the revisions are a wild card. As I stated this morning, the best idea is to maintain the smallest exposures possible for the time being, as volatility is the one thing on which we can count.

Good luck and good weekend

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fxpoetry

Explaining the rhyme and rhythm of the FX markets each day

Tag Archives: #trump

Confusion

Hard to Kill

A Fifth Wheel

Soaring Like Eagles

Having a Fit

Shattered His Dreams

Not in a Rush

Norms to Eschew

Loathing and Fear

Positioning’s Fraught