Recession in Sight

Posted on March 4, 2025 by fxpoet

There once was a policy view
That tariffs, we all should eschew
But President Trump
Explained on the stump
To this idea, he wouldn’t hew

And so, as the clock struck midnight
Trump’s tariffs once more saw the light
Most analysts say
The tariffs will weigh
On growth, with recession in sight

By now you are all aware that as of 12:01 EST this morning, 25% tariffs have been imposed on all imports from both Canada and Mexico except energy products, which have seen 10% tariffs imposed. As well, all Chinese imports have been hit with an additional 10% tariff. Once again, President Trump has proven to be a man of his word, promising these tariffs during his election campaign and imposing them now.

The mainstream view is that these tariffs are a disaster and will send the economy into a recession. In fact, the International Chamber of Commerce said a depression was likely. As well, there is much concern that inflation will rise during the recession, which for Keynesians must be a very difficult concept to grasp given their strongly held belief that a recession will result in declining inflation.

Now remember, I am just a poet, so please take that into account when I offer my views here. First, we have no idea how things will play out. The one thing about which I am extremely confident is that there will be numerous behavioral changes by everyone because of these tariffs. The first question is who will absorb the cost of the tariffs. Remember, essentially the definition of a recession is that demand is declining. Will companies be able to pass through the higher costs? In some instances, they likely will, but in others probably not. Anecdotally, there was a story in the WSJ that Chipotle will see its costs rise because of the tariff on avocados from Mexico but will not change their prices to account for that. I’m confident they are not the only company who will absorb those costs.

However, there will certainly be companies that believe they can raise prices and maintain their sales and will try to do that. My point is each company will evaluate the environment under which they operate and respond in the profit-maximizing manner, but each company’s scenario will be different.

Second, let’s consider the reason that President Trump is such a strong believer in tariffs. He sees them as the stick to achieve his goals. I would argue there are two goals in sight. With Canada and Mexico, he is still unsatisfied with their efforts on the border and with fentanyl smuggling and is very keen to push that to completion. However, the broader goal is to return manufacturing to America from its decampment overseas, mostly to Southeast Asia, during the past forty years. And remember, he is seeking to implement a carrot as well, looking to cut corporate taxes to 15% going forward, which would put the US in the lowest quartile of corporate tax rates in the world. While this morning the headlines are all about the tariffs and their potential destruction, just yesterday, Taiwan Semiconductor announced they would be investing $100 billion to build new fabrication plants in Arizona. That is exactly the response Trump is seeking.

We all recognize that the world today is very different than it was even two months ago as President Trump has taken an extraordinary number of steps to implement the ideas upon which he was elected. Interestingly, a large majority of the public remains strongly in his camp with approval ratings for many of his policies well above 60% and as high as 80%. While markets are clearly unhappy as they have no idea how things will play out, and companies are now faced with far more uncertainty as they attempt to plan for their future, there is no reason to believe this process is going to change anytime soon.

Keep one other thing in mind, unlike Trump’s first term in office, where he was constantly touting the strength of the stock market as a vote of confidence, this time around he and Treasury Secretary Bessent have been entirely focused on the 10-year yield and getting that rate down. After a 7bp decline yesterday, he has been successful there. (see chart below) I would be surprised if Trump speaks about the stock market much at all for a while.

Source: tradingeconomics.com

With that in mind, let’s see how markets have been handling the tariff imposition. After yesterday’s rout in the US, where a higher open morphed into a sharply lower close on the day, we saw red throughout Asia (Nikkei -1.2%, Hang Seng -0.3%, CSI 300 -0.1%) and Europe (DAX -2.1%, CAC -1.2%, IBEX -2.3%). In fact, it is far harder to find a market that has rallied at all, although US futures at this hour (6:40) are pointing slightly higher. However, after the sharp declines, an early bounce is not uncommon though not necessarily a harbinger of activity for the day. All of this makes sense as public companies are likely going to see impacts on their profitability either because of reduced sales or reduced margins, or both, with tariffs now in place. (Well, private companies are going to feel the same pressures, but there are no markets for them to worry about.). The worry for investors is given the extremely high price multiples that currently exist across so many companies, margin pressures can be problematic for stock prices. For the near term, it is easy to make the case that equities have further to fall.

In the bond market, after yesterday’s Treasury yield decline, there has been a modest 1bp bounce, although as per the above chart, the trend remains lower. In Europe, the news just hit the tape that the Eurozone is creating a plan to rearm the continent allowing for European countries to exceed debt restrictions to enable them to borrow and spend the money on this task. The mooted amount is €800 billion, meaning that markets can expect that much new debt issuance across the continent in the coming months and years. However, it appears investors are viewing the situation overall and are far more concerned with potential slowing growth than on increased issuance as yields have slipped one or two basis points across all nations in Europe. Perhaps that is a signal that there is little belief in the likelihood of this new plan coming to fruition.

In the commodity markets, oil (-1.4%) continues its slide as a combination of worries over future growth due to the US tariffs and the OPEC+ announcement that they would start to bring production back online beginning in April (just 138K bbl/day, but the signal is quite clear that more is on the way) has traders unnerved. Certainly, this is part of what President Trump is seeking, lower oil prices to help keep a lid on inflation, and there is no doubt he has pressured OPEC+ on the issue. Remember, too, that if gasoline prices fall at the pump, that is a key driver of inflation perceptions for everyone. As to the metals markets, we are seeing a split this morning with precious (Au +1.0%, Ag +0.65%) rallying on uncertainty and fear while copper (-1.2%) seems to be suffering on recession fears.

Finally, the dollar is lower again this morning with the DXY breaking back below 106 for the first time since early December as a signal of the broad trend. This is interesting as the textbooks claim that if the US imposes tariffs, the dollar will strengthen, or more accurately other currencies will weaken, to offset those tariffs, and yet this morning CNY (+0.55%) and CAD (+0.45%) are bucking that trend although MXN (-0.2%) is behaving as most would expect. But the dollar’s weakness is broad based, and my take is given the movement in interest rates, which are suddenly declining far more rapidly than anticipated just a week ago (Fed funds futures are now pricing in 75bps of cuts this year with a 11% probability of a cut in March, up from 2% last week) the dollar bull case is under real pressure. I have maintained all along that if the Fed reignited their easing policy, the dollar would suffer. Funnily enough, despite any angst between Chairman Powell (remember him?) and President Trump, they both may see lower rates as their preferred outcome. In that case, the dollar has further to fall.

There is no hard data set to be released today although we do hear from NY Fed President Williams this afternoon. This could be the first hint that the Fed’s caution is abating, and further rate cuts are in store. Of course, with Powell on the calendar for Friday, if there is a change in tone, most market participants will be waiting to hear it from him.

The watchword has shifted from caution to uncertainty. The tariffs have thrown sand into the gears of the economy and markets. It remains to be seen how much impact they will have, but for now, fear is rising although the dollar is not following suit. I think Trump must be happy, but I’m not sure how many in the markets are.

Good luck

Adf

Balling Their Fists

Posted on March 3, 2025 by fxpoet

The world is no longer the same
Since Trump put Zelenskiy to shame
Now Europe insists
They’re balling their fists
And this time it isn’t a game

But markets just don’t seem to care
That, anymore, war’s in the air
Instead, what’s decisive
Is that the new price of
All cryptos has answered their prayer

Last Friday’s remarkable live TV meeting between Presidents Trump and Zelenskiy in the Oval Office has rocked the entire world, or certainly the entire Western World. The unwillingness of Zelenskiy to consider a ceasefire and Trump’s dismissal of him from the White House, even before lunch, has clearly changed a lot of views of how things are going to evolve from here.

The most noteworthy result is the sudden realization by the EU and NATO that the US is committed to ending the war and is not interested in spending much, if any, more money on the subject. The response by the EU, an emergency meeting in London yesterday where every nation committed to a strong defense of Ukraine, including boots on the ground, is remarkable. My fear is that if they proceed along these lines, and French or British soldiers are attacked/shot during the conflict, NATO will seek to invoke Article 5 and drag the US into the conflict. Certainly, that appears to be Zelenskiy’s goal, to get the US to fight Russia on their behalf. (Although, there are those who might say the Biden administration was using Ukraine to fight Russia on their behalf, so this is ~~justified~~ not surprising.). In the end, I believe this path is terrifying as that would result in two nuclear powers meeting on the battlefield, perhaps a cogent definition of WWIII.

However, there is little evidence that market participants are terribly concerned about this situation. Perhaps they are confident that this is all bluster and ultimately President Trump’s plan of increasing US economic interests in Ukraine will be enacted and a sufficient deterrent to prevent that outcome. Or perhaps this is a YOLO moment, where the belief is, if nuclear war destroys the world, I can’t stop it, so I better make as much money as possible now. I recognize geopolitical risk is tough to price, but I would have expected a lot more flight to safety than so far seen.

In fact, in markets, the true story of the weekend was the announcement of a cryptocurrency reserve to be created by the US although no specific size was revealed. While I don’t typically write on the topic, that is because the crypto space has not yet, in my view, become enough of an influence on the macro world to matter. However, this could change that.

Source: tradingeconomics.com

One cannot be surprised that crypto currency prices have rallied dramatically on the back of the announcement, which almost seemed timed to arrest what had been a very sharp decline in those prices recently. It is too early to really determine if this will draw cryptocurrencies closer to mainstream economic and financial discussion, but I would argue it is closer now than it has ever been before.

In Europe, the scoop on inflation
Does not seem ripe for celebration
While CPI slipped
Most forecasts, it pipped
So, slower but not near cessation

Eurozone CPI data was released this morning and the response to the outcome is quite interesting. The data showed that headline fell from 2.5% to 2.4%, while core fell from 2.7% to 2.6%. Obviously, that is a step in the right direction. Alas, analysts’ forecasts were looking for a 0.2% decline in both readings, so while the data was good, it was worse than expectations. In a perfect encapsulation of how narrative writing is so critical, both the WSJ and Bloomberg wrote articles explaining how the declines had set the table for the ECB to cut rates at their meeting this Thursday with neither one discussing market forecasts.

Now, a look at the market response shows that European sovereign yields have all risen between 6bps and 9bps, hardly the response one would expect in a lower inflation world. As well, with Treasury yields higher only by 5bps this morning, as they bounce from their recent declines, the euro (+0.7%) has rallied sharply on the day.

Much has been made of the European’s new commitments to increase defense spending, especially in the wake of yesterday’s meeting discussed above, and the requisite increases in defense spending that would accompany this new stance. However, increased European defense spending has been a story for the past many weeks as President Trump has been railing against European members of NATO for not holding up their end of the bargain. I guess the meeting added a greater sense of urgency, but remember, not an additional dime has been spent yet, nor even legislated. Talk is cheap!

But there you have it. Despite what appears to be a giant step closer to a major global conflagration, the market response has been a more classic risk-on result, with bond yields rising, the dollar falling and most equity indices doing fine. Some days, things don’t make much sense.

Time for a quick recap of overnight markets then. Friday’s strong US equity rally was followed by strength in Tokyo (+1.7%) and Australia (+0.9%) although both Hong Kong and China were little changed in the session. It appears Chinese traders are awaiting the news from Wednesday’s NPC meeting where the government will define their economic growth targets for the current year and how they might achieve them. In Europe, Spain (-0.1%) is the laggard with the rest of the continent doing well, led by Germany (+1.1%). It seems there are more defense companies there to benefit from all this mooted spending than elsewhere, hence the rally. Lastly, US futures are higher by 0.35% or so at this hour (7:00).

We have already discussed bonds, where yields are higher everywhere, including Japan (+4bps) as all the war talk has investors convinced there will be a lot more government borrowing everywhere in the world going forward.

In the commodity markets, oil (+0.25%) has been trading either side of unchanged in the overnight session but seems to be consolidating after last week’s declines. I continue to believe that if the Ukraine war does end (and I believe that will be the outcome regardless of Europe’s hawkish turn), oil prices are likely to slide further as one of the likely outcomes will be the end of sanctions against Russian oil and Russian oil transports. Meanwhile, gold (+0.6%) which had a rough week last week, is bouncing and dragging the entire metals complex higher with it. If war is truly in the air, gold and silver seem likely to rally further.

Finally, the dollar is under great pressure this morning across the board. Not only is the euro higher, but only JPY (-0.4%) is weaker vs. the dollar in the G10 as this seems a very risk-on initiative. SEK (+1.3%) is the leader, perhaps because it is on the front lines of the potential war? Seriously, I have no explanation there. But EMG currencies are also rallying with HUF (+2.1%) the big winner, although the entire CE4 is stronger. Again, this makes little sense to me if the politics is pushing toward war as all those nations are on the front lines. Meanwhile, MXN (+0.4%) is managing to rally despite the ongoing threat of tariffs to be imposed tonight at midnight. I continue to read numerous stories on the potential impacts of tariffs with dramatically different takes. In the end, it appears that at least some things will go up in price, although fears of widespread massive price rises seem a bit overdone.

On the data front, along with Thursday’s ECB meeting, Friday brings the payroll report and there is plenty of stuff between now and then.

Today	ISM Manufacturing	50.5
	ISM Prices Paid	56.2
Wednesday	ADP Employment	140K
	ISM Services	52.9
	Factory Orders	1.6%
	-ex Transport	0.3%
	Fed’s Beige Book
Thursday	ECB Rate Decision	2.75% (current 3.00%)
	Trade Balance	-$93.1B
	Initial Claims	340K
	Continuing Claims	1870K
	Nonfarm Productivity	1.2%
	Unit Labor Costs	3.0%
Friday	Nonfarm Payrolls	153K
	Private Payrolls	138K
	Manufacturing Payrolls	5K
	Unemployment Rate	4.0%
	Average Hourly Earnings	0.3% (4.1% Y/Y)
	Average Weekly Hours	34.2
	Participation Rate	62.6%
	Consumer Credit	$15.5B

Source: tradingeconomics.com

In addition to this, we hear from 7 more Fed speakers at 9 venues including Chairman Powell Friday afternoon at 12:30. Now, I have made a big deal about the fact that the Fed has lost much of its sway in the market to President Trump. I believe that Powell’s speech will tell us much about whether they are unhappy about this, or whether they will be quite comfortable sinking into the background. Given Powell’s previous antagonistic relationship with President Trump, I would think it would be the latter. But every central banker seems drawn to the limelight like moths to a flame, so I would not be surprised to see something more dramatic.

As things currently stand, I see the ongoing efforts to cut government spending as a critical piece of the US fiscal puzzle. The more success that DOGE and the administration has in this process, the better the potential outcomes for the US, tariffs or not. This could increase private sector activity and reduce the deficit, thus slowing the debt issuance, and perhaps, weighing on inflation. However, this is a longer-term process, not something that will happen in weeks, but over quarters. In the meantime, I cannot get past the Ukraine situation as the biggest potential risk factors around, and if escalation is in the cards, I would expect Treasury yields to decline amid growing demand while the dollar rallies along with the yen as a haven. Hopefully not but be prepared.

Good luck

Adf

I Am Your Savior

Posted on February 28, 2025 by fxpoet

Investors are showing concern
‘Bout tariffs and Trump, so they spurn
The riskiest stuff
But that’s not enough
To help generate a return

Seems most of the holdings in favor
Are no longer risk takers’ flavor
How long before Jay
Will finally say
QE is here, I am your savior

Have you bailed out on your risk exposures yet? Because if not, it certainly seems you are behind the curve! At least, that’s what it feels like this morning as trepidation underlies every player’s market activity. Based on the commentary, as well as the Fear & Greed Index, you might think we are in a depression!

Source: cnn.com

But are things really that bad? I know that the past week has seen a modest drawdown in equity prices, but after all, on February 20^th, they reached yet another new all-time high, at least as per the S&P 500. Since then, as you can see below, the decline has been less than 5%. And while the market has traded below its 50-day moving average (blue line), a key technical indicator, it remains well above both the 200-day version of the same (purple line) and the longer-term trend line. My point is it feels like the narrative is overstating the magnitude of the move thus far.

Source: tradingeconomics.com

Is this the beginning of the end? While you can never rule that out, as major corrections can occur at any time, I have no reason to believe this will be the case. Much has been made of yesterday’s Initial Claims print at 242K, much higher than forecast as a harbinger of future economic weakness. However, looking at the past 3 years of weekly data here, while certainly in the upper levels of readings, it is not nearly the only occurrence and not nearly the highest reading.

Source: tradingeconomics.com

One data point does not make a trend and to my eye, looking at this chart, there is no discernible trend in either direction. Yet part of the narrative evolution is that the DOGE cuts in government jobs, along with all the headline spending cuts, is setting the economy up for much slower growth in the short run.

In fact, this issue goes back to one about which I wrote several days ago here regarding the impact of government spending on actual economic activity. The current view of economic activity includes government spending. If President Trump’s goal is to reduce that spending, regardless of the net long-term benefits of such actions, GDP readings are going to decline initially. Yes, there will be more productive use of capital with less regulation and less government, but that will take some time to become evident. In the meantime, weaker economic activity is likely to be the outcome.

I have frequently written that there has not been a market clearing event since, arguably, October 1987, when equity markets plunged and erased significant excess and speculation. Alas, newly minted (at the time) Fed Chair Greenspan stepped in and promised to support markets with ample liquidity the next day which opened the way for far more Fed intervention in markets leading up to Ben Bernanke and the first QE programs in the wake of the GFC in 2009 and every QE version since then. While the movement so far does not remotely indicate the end of the world, based on the Fed’s history, once equity markets correct about 20%, they tend to become far more active in supporting the ~~markets~~ economy. Will this time be different? Given the Fed’s seeming underlying desperation to cut rates to begin with, my take is if the correction reaches 15% – 20%, we will see just that.

To sum things up, risk assets are under pressure on the basis of 1) excessive valuations, 2) the Trump efforts to reduce wasteful spending (which while wasteful is still spending and counted as economic activity), and 3) the idea that Trump’s imposition of tariffs is going to dramatically raise inflation and slow growth further. Given the mainstream media’s inherent hatred of the president, they will certainly be playing up this theme for as long as they can as they try to force Trump to change tack. But Trump, and Treasury Secretary Bessent, have been clear that their concern is 10-year bond yields, and getting them to lower levels. A natural corollary of the current risk-off sentiment is that bond yields tend to decline. Look at the chart below which shows that since Trump’s inauguration, 10-year yields are down nearly 40bps. I would argue that Trump and Bessent are perfectly comfortable with the market right now.

Source: tradingeconomics.com

Ok, let’s move on to the overnight activity. Sticking to the bond theme, while Treasuries, this morning, are unchanged, they did decline all yesterday afternoon and this morning European sovereigns are all lower by -2bps. As well, JGB yields have also slipped by -3bps as we are seeing risk aversion evident all around the world. Of course, the problem with all G10 nations (Germany excepted) is that they all have very high debt/GDP ratios and in Europe, especially, this is a problem as they have begun to realize they need to spend a great deal more on defense than they have in the past. And all that spending is going to be funded by more borrowing. The tension between additional issuance driving yields higher and risk aversion driving yields lower is going to be the theme of European bond markets for a while.

In the equity world, it is not a pretty picture anywhere in the world. After yesterday’s US rout, with the NASDAQ (-2.8%) leading the way lower, Asian bourses were all in the red. Japan (-2.9%), Hong Kong (-3.3%), China (-2.0%), Korea (-3.4%), India (-1.9%)… the list goes on across the entire region with only New Zealand (+0.5%) bucking the trend on some better than expected local earnings and consumer confidence data. European markets, though, are in a bit better shape as they suffered yesterday and are consolidating those losses this morning with most markets trading +/- 0.3% on the session. We have seen a lot of European inflation data this morning, most of it lower than forecast which has encouraged the view that the ECB will be cutting rates more aggressively going forward. US futures, too, are higher at this hour (7:00), on the order of 0.5% as they bounce from yesterday’s, and truly the past week’s, declines.

In the commodity markets, oil (-1.25%) is back under pressure and back under $70/bbl. The latest fear is that slowing economic activity around the world will reduce demand for the black sticky stuff and drive prices lower still. Remember this, oil supply is restricted not by geology, but by politics. As nations determine that cheaper energy is critical to their future, expect to see more effort to produce more oil. Meanwhile, metals markets are also under pressure with gold (-0.5%) still falling despite its ostensible risk profile. However, the barbarous relic remains well above $2800/oz and I continue to believe that this correction is just that, and not the reversal of a trend. Too many things are happening around the world to induce more fear and in that scenario, gold is the oldest store of value around. The rest of the metals complex is also under pressure with copper (-1.2%) slipping back a bit. It is important to remember, though, that despite the recent declines, all the major metals are still nicely higher on the month.

Finally, the dollar is a bit firmer again this morning after a rally yesterday as well. In classic risk-off fashion, investors flocked to the dollar, arguably to buy Treasuries. So, we are seeing weakness in NZD (-0.6%), JPY (-0.4%) and CHF (-0.3%) in the G10 and weakness in KRW (-0.5%), ZAR (-0.2%) amongst others in the EMG bloc. Here the story remains the impacts of Trump’s tariffs and how they will be applied, if they will be applied, as well as a general fear factor which tends to help the dollar. Consider, too, ideas that the ECB is going to cut rates will not help the single currency.

On the data front, this morning brings Personal Income (exp +0.3%), Personal Spending (0.1%), and the PCE data where Headline (0.3%, 2.5% Y/Y) and Core (0.3%, 2.6% Y/Y) will be the most important data points. As well, we will see Chicago PMI (40.6) which has been below 50.0 in every month but one since August 2022.

There is no question that the economic data has been softening lately. We saw that with the Citi Surprise Index as well as the continuous stream of commentary by the economic bears who point to underlying pieces of data that point in that direction (whether housing or employment indicators and the recent weak PMI data).

Consider this, an early recession in Trump’s term can be blamed on the Biden administration as well as set things up for future growth, certainly in time for the mid-term elections. As well, it will likely help reduce the yield on the 10-year, an explicit goal. This scenario likely means short-term weakness with an eye to longer term growth. The dollar is likely to benefit early on, at least until the Fed steps in.

Good luck and good weekend

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Eyes Like a Bat

Posted on February 27, 2025 by fxpoet

The new Mr Yen
Is watching for excess moves
With eyes like a bat

While every day of this Trump presidency is filled with remarkable activity at the US government level, financial markets are starting to tune out the noise. Yes, each pronouncement may well be important to some part of the market structure, but the sheer volume of activity is overwhelming investment views. The result is that while markets are still trading, there seem to be fewer specific drivers of activity. Consider the fact that tariffs have been on everyone’s mind since Trump’s inauguration, but nobody, yet, has any idea how they will impact the global macro situation. Are they inflationary? Will sellers reduce margins? Will there be a strong backlash by the US consumer? None of this is known and so trading the commentary is virtually impossible.

With that in mind, it is worth turning our attention this morning to Japan, where the yen (-0.4%) has been steadily climbing in value, although not this morning, since the beginning of the year as you can see from the chart below.

Source: tradingeconomics.com

Amongst G10 currencies, the yen is the top performer thus far year-to-date, rising about 5%. Arguably, the key driver here has been the ongoing narrative that the BOJ is going to continue to tighten monetary policy while the Fed, as discussed yesterday, is still assumed to be cutting rates later in the year.

Let’s consider both sides of that equation. Starting with the Fed, just yesterday Atlanta Fed president Bostic explained to a housing conference, “we need to stay where we are. We need to be in a restrictive posture.” Now, I cannot believe the folks at the conference were thrilled with that message as the housing market has been desperate for lower rates amid slowing sales and building activity. But back to the FX perspective, what if the Fed is not going to cut this year? It strikes me that will have an impact on the narrative, and by extension, on market pricing.

Meanwhile, Atsushi Mimura, the vice finance minister for international affairs (a position known colloquially to the market as Mr Yen) explained, when asked about the current market narrative regarding the BOJ’s recent comments and their impact on the yen, said, “there is no gap with my view. Amid high uncertainty, we have to keep watching the impact of any speculative trading on, not only the exchange market, but also financial markets overall.”

If I were to try to describe the current market narrative on the yen, it would be that further yen strength is likely based on the assumed future narrowing of interest rate differentials between the US and Japan. That has been reinforced by Ueda-san’s comments that they expect to continue to ‘normalize’ policy rates, i.e. raise them, if the economy continues to perform well and if inflation remains stably at or above their 2% target. With that in mind, a look at the below chart of Japanese core inflation shows that it has been above 2.0% since April 2022. That seems pretty stable to me, but then I am just a poet.

Source: tradingecomnomics.com

Adding it all up, I feel far better about the Japanese continuing to slowly tighten monetary policy as they have a solid macro backdrop with inflation clearly too high and looking like it may be trending a bit higher. However, the other side of the equation is far more suspect, as while the market is pricing in rate cuts this year, recent Fed commentary continues to maintain that the current level of rates is necessary to wring the last drops of inflation out of the economy.

There is a caveat to this, though, and that is the gathering concern that the US economy is getting set to fall off a cliff. While that may be a bit hyperbolic, I do continue to read pundits who are making the case that the data is starting to slip and if the Fed is not going to be cutting rates, things could get worse. In fairness to that viewpoint, the Citi Surprise Index is pointing lower and has been declining since the beginning of December, meaning that the data releases in the US have underperformed expectations for the past two months. (see below)

Source: cbonds.com

However, a look at the Atlanta Fed’s GDPNow estimate shows that Q1 is still on track for growth of 2.3%, not gangbusters, but still quite solid and a long way from recession. I think we will need to see substantially weaker data than we have to date to get the Fed to change their wait-and-see mode, and remember, employment is a lagging indicator, so waiting for that to rise will take even longer. For now, I think marginal further yen strength is the most likely outcome as we will need a big change in the US to alter current Fed policy.

Ok, let’s see how markets have behaved overnight. Yesterday saw a reversal of recent US equity performance with the DJIA slipping while the NASDAQ rallied, although neither moved that far. In Asia, the Nikkei (+0.3%) edged higher as did the CSI 300 (+0.2%) although the Hang Seng (-0.3%) gave back a small portion of yesterday’s outsized gains. The rest of the region, though, was under more significant pressure with Korea, Taiwan, Indonesia and Thailand all seeing their main indices decline by more than -1.0%. In Europe, red is the most common color on the screen with one exception, the UK (+0.35%) where there is talk of resurrecting free trade talks between the US and UK. But otherwise, weakness is the theme amid mediocre secondary data and growing concern over US tariffs. Finally, US futures are nicely higher this morning after Nvidia’s earnings were quite solid.

In the bond market, Treasury yields (+4bps) have backed up off their recent lows but remain in their recent downtrend. Traders keep trying to ascertain the impacts of Trump’s policies and whether DOGE will be able to find substantial budget cuts or not with opinions on both sides of the debate widely espoused. European sovereign yields have edged higher this morning, up 2bps pretty much across the board, arguably responding to the growing recognition that Europe will be issuing far more debt going forward to fund their own defensive needs. And JGB yields (+4bps) rose after the commentary above.

In the commodity markets, oil (+1.1%) is bouncing after a multi-day decline although it remains below that $70/bbl level. The latest news is that Trump is reversing his stance on Venezuela as the nation refuses to take back its criminal aliens. Meanwhile, gold (-1.1%) is in the midst of its first serious correction in the past two months, down a bit more than 2% from its recent highs, and trading quite poorly. There continue to be questions regarding tariffs and whether gold imports will be subject to them, as well as the ongoing arbitrage story between NY and London markets. However, the underlying driver of the barbarous relic remains a growing concern over increased riskiness in markets and rising inflation amid the ongoing deglobalization we are observing.

Finally, the dollar is modestly firmer overall vs. its G10 counterparts, with the yen decline the biggest in the bloc. However, we are seeing EMG currency weakness with most of the major currencies in this bloc lower by -0.3% to -0.5% on the session. In this case, I think the growing understanding that the Fed is not cutting rates soon, as well as concerns over tariff implementation, is going to keep pressure on this entire group of currencies.

On the data front, we see the weekly Initial (exp 221K) and Continuing (1870K) Claims as well as Durable Goods (2.0%, 0.3% ex Transport) and finally the second look at Q4 GDP (2.3%) along with the Real Consumer Spending piece (4.2%). Four Fed speakers are on the calendar, Barr, Bostic, Hammack and Harker, but again, as we heard from Mr Bostic above, they seem pretty comfortable watching and waiting for now.

While I continue to believe the yen will grind slowly higher, the rest of the currency world seems likely to have a much tougher time unless we see something like a Mar-a Lago Accord designed to weaken the dollar overall. Absent that, it is hard to see organic weakness of any magnitude, although that doesn’t mean the dollar will rise. We could simply chop around on headlines until the next important shift in policy is evident.

Good luck

Adf

As It’s Been Wrote

Posted on February 26, 2025 by fxpoet

Though China would have you believe
Their goals, they are set to achieve
Their banks are in trouble
From their housing bubble
So capital, now, they’ll receive

Meanwhile, with Ukraine there’s a deal
For mineral wealth that’s a steal
This will help the peace
If war there does cease
And so, it has broader appeal

But really, the thing to denote
Is everything is anecdote
The data don’t matter
Unless it can flatter
The narrative as it’s been wrote

Confusion continues to be the watchword in financial markets as it is very difficult to keep up with the constant changes in the narrative and announcements on any number of subjects. And traders are at a loss to make sense of the situation. This is evidenced by the breakdown in previously strong correlations between different markets and ostensibly critical data for those markets.

For example, inflation expectations continue to rise, at least as per the University of Michigan surveys, with last week’s result coming in at 4.3% for one year and 3.5% for 5 years. And yet, Treasury yields continue to fall in the back end of the curve, with 10-year Treasury yields lower by nearly 15bps since that report was released on Friday. So, which is it? Is the data a better reflection of things? Or is market pricing foretelling the future?

Source: tradingeconomics.com

At the same time, the Fed funds futures market is now pricing in 55bps of cuts this year, up from just 29bps a few weeks ago. Is this reflective of concerns over economic growth? And how does this jibe with the rising inflation expectations?

Source: cmegroup.com

If risk is a concern, why is the price of gold declining?

Source: cnn.com

My point is right now, at least, many of the relationships that markets and investors have relied upon in the past seem to be broken. They could revert to form, or perhaps this is a new paradigm. In fact, that is the point, there is no clear pathway.

Sometimes a better way to view these things is to look at policy actions at the country level as they reflect a government’s major concerns. I couldn’t help but notice in Bloomberg this morning the story that the Chinese government is going to be injecting at least $55 billion of equity into their large banks. Now, government capital injections are hardly a sign of a strong industry, regardless of the spin. This highlights the fact that Chinese banks remain in difficult straits from the ongoing property market woes and so, are clearly not lending to industry in the manner that the government would like to see. I’m not sure how injecting capital into large banks that lend to SOE’s is helping the consumer in China, which allegedly has been one of their goals, but regardless, actions speak louder than words. Clearly the Chinese remain concerned over the health of their economy and are doing more things to support it. As it happens, this helped equity markets there last night with the Hang Seng (+3.3%) ripping higher with mainland shares (+0.9%) following along as well. Will it last? Great question.

Another interesting story that seems at odds with what the narrative, or at least quite a few headlines, proclaimed, is that the US and Ukraine have reached a deal for the US to have access to Ukrainian rare earth minerals once the fighting stops. The terms of this deal are unclear, but despite President Zelensky’s constant protests that he will not partake in peace talks, it appears that this is one of the steps necessary for the US to let him into the conversation. Now, is peace a benefit for the markets? Arguably, it is beneficial for lowering inflation as the one thing we know about war is it is inflationary. If peace is coming soon, how much will that help the Eurozone economy, which remains in the doldrums, and the euro? Will it lower energy prices as sanctions on Russian oil and gas disappear? Or will keeping the peace become a huge expense for Europe and not allow them to focus on their domestic issues?

Again, my point is that there are far more things happening that add little clarity to market narratives, and in some cases, result in price action that is not consistent with previous relationships. With this I return to my preaching that the only thing we can truly anticipate is increased volatility across markets.

With that in mind, let’s consider what happened overnight. First, US markets had another weak session, with the NASDAQ particularly under pressure. (I half expect the Fed to put forth an emergency rate cut to support the stock market.) As to Asian markets, that Chinese news was well received almost everywhere except Japan (Nikkei -0.25%) as most other markets gained on the idea that Chinese stimulus would help their economies. As such, we saw gains virtually across the board in Asia. Similarly, European bourses are all feeling terrific this morning with the UK (+0.6%) the laggard and virtually every continental exchange higher by more than 1%. Apparently, the Ukraine/US mineral rights deal has traders and investors bidding up shares for the peace dividend. Too, US futures are higher at this hour, about 0.5% or so across the board.

As to bond yields, after a sharp decline in Treasury yields over the past two sessions, this morning, the 10-year is higher by 1bp, consolidating that move. Meanwhile, European sovereign yields are all slipping between -2bps and -4bps as the peace dividend gets priced in there as well. While European governments may be miffed they have not been part of the peace talks, clearly investors are happy. Also, JGB yields, which didn’t move overnight, need to be noted as having fallen nearly 10bps in the past week as the narrative of ever tighter BOJ policy starts to slip a bit. While the yen has held its own, and USDJPY remains just below 150, it appears that for now, the market is taking a respite.

In the commodity markets, oil (-0.25% today, -2.0% yesterday) has convincingly broken below the $70/bbl level as this market clearly expects more Russian oil to freely be available. OPEC+ had discussed reducing their cuts in H2 this year, but if the price of oil continues to slide, I expect that will be changed as well. Certainly, declining oil prices will be a driver for lower inflation, arguably one of the reasons that Treasury yields are falling. So, some things still make some sense. As to the metals markets, gold (-0.2%) still has a hangover from yesterday’s sharp sell-off, although there have been myriad reasons put forth for that movement. Less global risk with Ukraine peace or falling inflation on the back of oil prices or suddenly less concern over the status of the gold in Ft Knox, pick your poison. Silver is little changed this morning but copper, which had been following gold closely, has jumped 2.7% this morning after President Trump turned his attention to the red metal for tariff treatment.

Finally, the dollar is firmer this morning, recouping most of yesterday’s losses. G10 currencies are lower by between -0.1% (GBP) and -0.5% (AUD) with the entire bloc under pressure. In the EMG space, only CLP (+0.45%) is managing any strength based on its tight correlation to the copper price. But otherwise, most of these currencies have slipped in the -0.1% to -0.3% range.

On the data front, New Home Sales (exp 680K) is the only hard data although we do see the EIA oil inventory numbers with a small build expected. Richmond Fed president Barkin speaks again, but as we have seen lately, the Fed’s comments have ceased to be market moving. President Trump’s policy announcements are clearly the primary market mover these days.

Quite frankly, it is very difficult to observe the ongoing situation and have a strong market view in either direction. There are too many variables or perhaps, as Donald Rumsfeld once explained, too many unknown unknowns. Who can say what Trump’s next target will be and how that will impact any particular market. In fact, this points back to my strong support for consistent hedging programs to help reduce volatility in one’s financial reporting.

Good luck

Adf

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

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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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fxpoetry

Explaining the rhyme and rhythm of the FX markets each day

Tag Archives: #trump

Recession in Sight

Balling Their Fists

I Am Your Savior

Eyes Like a Bat

As It’s Been Wrote

Confusion

Hard to Kill

A Fifth Wheel

Soaring Like Eagles

Having a Fit