Tag Archives: #trump

A Warning

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Though Trump has been leading the news
With folks asking who he will choose
As agency chiefs
That share his beliefs
For markets, today brings new cues
 
Inflation will soon be released
And though Jay claims he killed this beast
The data this morning
May well be a warning
Inflation, in fact, has not ceased

 

Source: tradingeconomics.com

Beauty (and everything else) is in the eye of the beholder.  So, what are we to make of the above chart which shows the past ten years’ worth of monthly Core CPI readings prior to this morning’s release.  Some eyes will travel to the peak in April 2021 (0.812%) and see a downward sloping line from there.  The implication is that the trend is your friend and that things are going well.  Others will gravitate to the June 2023 print (0.195%) and see that except for a blip lower in June 2024 (0.1%), the series looks like it may have bottomed and, if anything, has found a new home.

Remember, that if the monthly print is 0.3%, that annualizes to 3.7% Core CPI.  That seems pretty far above the 2.0% target that the Fed is shooting for and would call into question exactly why they are cutting interest rates.  In fact, you can look at the above chart and see that prior to the pandemic, core CPI on a monthly basis was below 0.3% every month except one, with many clearly down near the 0.1% level.

As much as Powell and his minions want to convince us that inflation is heading back to their goal and everything is ok, the evidence does not yet seem to be pointing in that direction.  For today, current median analyst expectations are for a headline of 0.2% M/M, 2.6% Y/Y and a core of 0.3% M/M, 3.3% Y/Y.  Even if the data comes as expected, it would seem very difficult to justify continuing to cut rates given the equity market remains essentially at all-time highs, while Treasury yields (-1bp today, +12bps yesterday) seem like they are starting to price in higher long-term inflation.

However, something interesting seems to be happening with the Fed speakers.  Richmond Fed President Barkin yesterday explained that things look pretty good, but declined to even consider forecasting where things will go.  As well, Minneapolis Fed President Kashkari indicated that while inflation has declined, it does not yet seem dead.  The Fed funds futures market is now pricing just a 62% probability of a rate cut in December.  One month ago, it was pricing an 84% probability.  As I have maintained, it seems increasingly difficult for the Fed to make the case that rate cuts are necessary given the economic data that we continue to see.  I understand that there are still a large group of pundits who believe things are much worse when you dig under the surface of the data, and I also understand that most people in the country don’t believe that things are going that well, hence the landslide election results for Mr Trump.  However, based on the data that the Fed allegedly follows, rate cuts seem difficult to support.  Today will be another piece of the puzzle.  If the data is hot, I expect risk assets to suffer more and the dollar to continue its rally.  If the data is soft, look for new records in stocks while the dollar retraces some of its recent gains.

With that in mind, let’s look at what happened overnight in markets.  Yesterday’s modest declines in the US market were followed by more selling than buying in Asia with the Nikkei (-1.7%) leading the way lower but weakness also seen in Australia (-0.75%), Korea (-2.65%), India (-1.25%) and Taiwan (-0.5%) as an indication of the general sense in the time zone.  The outlier here was mainland China (+0.6%) where hope remains eternal that the government will fire their bazooka.  In Europe, though, this morning is seeing a hint of red with most major indices lower by just -0.1% and Spain’s IBEX (+0.2%) even managing a small gain.  The commentary from the continent is over fears of how things will evolve with the new Trump administration and his threat of more tariffs on European exports.

But here’s something to consider.  If Trump is successful in quickly negotiating an end to the Russia/Ukraine war, won’t that be a huge benefit to Europe?  After all, if the war is over, they will be able to restart imports of cheap Russian NatGas which should have an immediate impact on their overall cost of energy, especially Germany, and help the economies there substantially.  I know they love to scream because they all hate Trump, but it seems like he could help them a lot if they would let him.  Oh yeah, US futures are a touch lower, -0.2%, at this hour (7:10).

Anyway, in the bond market, after yesterday’s rout in the US, yields are little changed this morning but in Europe, yields are climbing as they weren’t able to keep up with US yields yesterday.  So, on the continent, yields are higher between 2bps and 4bps after rising 4bps – 6bps yesterday.  In Asia, JGB yields jumped 4bps on the global rise in bond yields and are now back above 1.0%.  However, that has not been nearly enough to help the yen (-0.2%), which continues to weaken and is pushing back above 155.00 this morning.  

In the commodity markets, oil (+0.2%) is edging higher, but that seems to be consolidation after what has been a pretty awful week for the black sticky stuff.  OPEC reduced its demand forecasts for the 4th consecutive month, something else that is weighing on the price and, of course, the Trump administration is going to seek to make it much easier to explore for and produce more oil.  In the metals markets, gold (+0.5%) seems to have found a temporary bottom along with silver (+0.8%) although the damage has been substantial this week.  However, copper and aluminum remain under pressure as fears over continued weakness in China seem to be weighing on the price.

Finally, the dollar has stopped rising sharply, although it is not really declining very much, at least not vs. the G10 currencies.  In fact, vs. the G10, the dollar is softer by just 0.1% or so vs. the entire bloc other than the yen mentioned above.  However, vs. the EMG bloc, the dollar has ceded some more gains with KRW (+0.7%) the leader but MXN (+0.4%), CNY (+0.35%) and ZAR (+0.6%) all bouncing back after a week of substantial declines.  We all know nothing goes up or down in a straight line, so this consolidation is just that, it is not a trend change by any stretch.  A quick look at the MXN chart below, which is essentially what we have seen everywhere, explains just how insignificant the overnight movement has been relative to the recent trend.

Source: tradingeconomics.com

On the data front, aside from the CPI data, we hear from three more Fed speakers (Logan, Musalem and Schmid) so it will be interesting to see if they are starting to change their sense of how things are going to progress.  Of course, all eyes will be on Powell’s speech Thursday afternoon, but perhaps there are some clues to be had here.

It is not clear to me that anything has changed in the big picture.  The US economy continues to be the strongest one around and now has the added impetus of expectations for more positivity with the change in the administration.  In that environment, my long-term view on the dollar remains it has further to run.

Good luck

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Great Expectations

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In Europe, the largest of nations
Is faltering at its foundations
The ‘conomy’s sagging
And tongues are now wagging
‘Bout voting and great expectations
 
Alas for the good German folk
The government’s turned far too woke
Their energy views
Have caused them the blues
And soon they may realize they’re broke

 

With elections clearly on almost everybody’s mind, it can be no surprise that the crumbling government in Germany has also finally accepted their fate and called for a confidence vote to be held on December 16 which, when Chancellor Olaf Scholz loses (it is virtually guaranteed), will lead to a general election on February 23, 2025.  As has happened in literally every election held thus far in 2024, the incumbents are set to be tossed out.  The problems that have arisen in Europe, with Germany being ground zero, is that the declarations by the mainstream parties to avoid working with the right-wing parties that have garnered approximately 25% of the population’s support almost everywhere, means that the traditional parties cannot create working coalitions that make any sense.  After all, the German government that is collapsing was a combination of the Center-left Social Democrats, the far-left Greens and the free market FDP.  That was always destined to fail so perhaps the fact it took so long is what should be noted.

At any rate, it is not hard to understand why the people of Germany are unhappy given the economic situation there.  The economy hasn’t grown in more than two years, basically stagnating, while inflation continues to run above 2%.  Meanwhile, energy prices have risen sharply as a consequence of their Energiewende policy; the nation’s attempt to achieve net zero CO2 emissions.  However, not only did they shutter their nuclear generating fleet, the most stable source of CO2 free electricity, they decided that wind and solar were the way forward.  Given that there are, on average, between 1600 and 1700 hours of sunshine annually (4.3 to 4.5 hours per day), that seemed like a bad bet.  The results cannot be surprising as Germany energy costs are amongst the highest in the world.  The below chart shows electricity prices around the world.

Source: statista.com

If you want a good reason as to why incumbent governments around the world are falling, you don’t have to look much further than this.  Meanwhile, this morning brought the German ZEW Economic Sentiment Index which printed at 7.4, well below both last month and expectations.  As well, the Current Conditions Index fell to -91.4, which while not the lowest ever, certainly indicates concern given -100 is the end of the scale.  

I’m sure you won’t be surprised to note that the euro (-0.4%) has fallen further this morning amid a broad-based dollar rally, that German stocks (DAX -0.8%) are falling and German bund yields (-2bps) are also falling as it becomes ever clearer that the ECB is going to need to cut rates more aggressively than previously anticipated.  Perhaps the story of Bayer Chemical today, where their earnings fell 26% and the stock has fallen 11% to a level not seen since 2009, is a marker.  Just like Volkswagen, they are set to cut costs (i.e., fire people) further.  Germany is having a rough go, and if they continue to perform like this, Europe will have a hard time going forward.

So, while the media in the US continues to focus on President-elect Trump and his activities as he fills out his cabinet posts and other government roles, elsewhere around the world, governments are trying to figure out how to respond to the changes coming here.

In that vein, the COP 29 Climate Conference is currently ongoing in Baku, Azerbaijan (a major oil drilling city) but finding much less press than previous versions.  As well, the attendee list has shrunk, especially from governments around the world.  This appears to be another consequence of the shift in voting preferences.  In fact, I expect that over the next four years, the number of discussions on climate will decline substantially.  

Perhaps the best place to observe how things are changing is China, as they now find themselves in the crosshairs of Trump’s policy changes and they know it.  The question is how they will respond with their own policies.  Recall, last week there were great hopes that we would finally see that big bazooka of fiscal stimulus and it was never fired.  Recent surveys of analysts, while continuing to hope for that elusive stimulus, now see a greater chance of Xi allowing the CNY to decline more rapidly to offset the impacts of tariffs.  This is something that I have expressed for a long time, that the CNY will be the relief valve for the Chinese economy as it comes under pressure.  Certainly, the market seems to be on board with this thesis as evidenced by the CNY’s movement since the election.  I expect there is further to run here.

Source: tradingeconomics.com

Ok, between Germany and China, those were the big stories away from the Trump cabinet watch.  Let’s see how markets behaved overnight in the wake of yet another set of record high closings in the US yesterday.  Despite the yen’s weakness, the Nikkei (-0.4%) was under pressure, although nothing like the pressure seen in China (Hang Seng -2.8%, CSI 300 -1.1%) or even elsewhere in Asia (Korea -1.9%, India -1.0%, Taiwan -2.3%) with pretty much the entire region in the red.  Of course, the same is true in Europe with all the major bourses under pressure (CAC -1.3%, FTSE 100 -1.0%) alongside the DAX’s decline.  As to US futures, at this hour (7:15) they are essentially unchanged as we await a series of five more Fed speeches.

In the bond market, Treasury yields (+6bps) are rising as it appears the 4.30% level is acting as a trading floor now that we have seen moves above it.  However, as mentioned above, the weaker economic prospects in Europe have seen yields across the continent soften between -1bp and -2bps.  Futures markets are now pricing more rate cuts by the ECB over the next year than the Fed although both are pricing about the same probability of a cut in December.  I think the direction of travel is less Fed cutting and more ECB cutting and that will not help the euro.

In the commodity markets, the rout in the metals markets continues with both precious (Au -0.8%, Ag -1.0%) and industrial (Cu -2.0%, Al -0.8%) finding no love.  In fairness, these had all seen very substantial rallies since the beginning of the year, so much of this is profit-taking, although there are those who believe that Trump will be able to arrest the constant rise in US debt issuance.  I’m not so sure about that.  As to oil (+0.6%) it has found a temporary bottom for now, but I do expect that it will continue to see pressure lower.

Finally, the dollar is king today, higher against every one of its counterparts in both the G10 and EMG blocs.  In the G10, the movement is almost uniform with most currencies declining between -0.4% and -0.5% although CHF (-0.1%) is trying to hang on.  In the EMG bloc, there are some larger declines (ZAR -0.8%, CZK -0.9%, HUF -0.9%) while LATAM currencies are lower by -0.5% and we saw similar movements in Asia overnight, -0.5% declines or so.  Again, it is difficult to make a case, at least in the near term, for the dollar to decline very far.  Keep that in mind when considering your hedges.

On the data front, the NFIB Small Business Optimism Index was released earlier at a better than expected 93.7, roughly the same as the July reading and potentially heading back toward the 2022 levels obtained during the recovery from the covid shutdowns.  I expect the election results had some part in this move.  Otherwise, its Fed speakers and we wait for tomorrow’s CPI.  All signs continue to point to a positive view in the US and a stronger dollar going forward.  Parity in the euro is on the cards before long.

Good luck

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Lickspittle

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The Fed has a banker named Jay
Who last week was quick to betray
His fervent belief
He can’t come to grief
If Trump wants to force him away
 
This morning his Journal lickspittle
Wrote glowingly ‘bout Jay’s committal
To stand strong and firm
And finish his term
No matter how much he’s belittled

 

First, on this Veteran’s Day holiday, let us all pause a minute and remember those veterans who gave their lives for our nation.

The reverberations of Donald Trump’s re-election last week continue to be felt around the world with comments from virtually every walk of life explaining their joy/distress at the outcome and trying to prognosticate what will play out in the future.  I will tell you that I have no idea how things will evolve, although I am hopeful that his administration will be able to reduce the size of the federal government as that can only be a benefit.

But one of the things that we learn about people during times of change, especially people who believe they are crucially important to the world, is just how much they believe they are crucially important to the world.  Nothing highlights this quite like the lead article in this morning’s WSJ titled, If Trump Tries to Fire Powell, Fed Chair Is Ready for a Legal Fight.  This is not to say that Powell doesn’t have an important role, he certainly does.  But this pre-emption of the entire question is a testimony of just how important he thinks he is.  

My one observation on this is that despite all the discussion that the Fed isn’t political, it is clearly a very political institution.  Nothing highlights that better than this Tweet from Joseph Wang (aka @FedGuy12), a commentator who spent a dozen years at the Fed and understands its inner workings quite well.  Under the rubric that a picture is worth 1000 words, take a look at Federal Reserve political contributions below and then ask yourself if the Fed is not only political, but partisan.  

Source: X @FedGuy12

It is important to recognize this as it also may help explain why the Fed is cutting interest rates despite GDP (currently 2.8%) and Core PCE (currently 2.7%) running far above their long-term expectations and Unemployment (currently 4.1%) running below their long-term expectations as per the below SEP from the September FOMC meeting.  If anything, I might argue they should be raising interest rates!

Source: fedreserve.gov

At any rate, the ramifications of this election outcome are likely to drive the market narrative for a while yet.

But overnight, there just wasn’t that much of interest, at least not that much new.  So, let’s take a look at overnight market activity.  After Friday’s latest record high closes in the US, the picture in Asia was less robust with Japanese equities basically unchanged on the day after Shigeru Ishiba was elected PM to run a minority government, while Hong Kong (-1.5%) and mainland Chinese (+0.7%) shares went in opposite directions.  Chinese financing data was released that was mildly disappointing, but there are several stories about how the government is going to reacquire land that is currently in private hands but not being used and repurpose it for benefit.  The rest of the region had many more laggards than gainers, perhaps on concerns that Trump will be imposing tariffs throughout the region.  As to Europe, despite all the pearl clutching by the leadership there, equity investors are excited with gains seen across the board (DAX +1.3%, CAC +1.2%, FTSE 100 +0.8%).  US futures at this hour (7:30) are continuing their ride higher, up 0.4%.

In the bond market, Treasuries aren’t really trading today with banks closed.  In Europe, sovereign yields have edged down between 1bp and 2bps, perhaps feeling a little of that equity euphoria, as there was precious little in the way of news or commentary to drive things.

In the commodity space, oil (-1.7%) is under further pressure as broadly slower global growth undermines demand while prospects of the Trump administration fostering significant additional drilling opportunities helps build the supply side.  However, NatGas (+7.0%) is soaring this morning as Europe, notably Germany, is suffering from dunkelflaute (maybe the best word I have ever heard) which means ‘a period of low wind and solar power generation because it is cloudy, foggy and still’, and so they need to buy a lot more NatGas to power the economy.  In fact, NatGas is higher by nearly 15% in the past month although remains substantially cheaper in the US than in Europe and Asia.  My take is this discrepancy cannot last forever.  As to the metals markets, they are under pressure again this morning with both precious (Au -0.9%, Ag -0.3%) and industrial (Cu -0.5%, Al-1.4%) feeling the pain.  

A key driver in the metals space is the dollar, which is rallying against all its counterparts this morning quite robustly.  The euro (-0.6%) is back to levels last briefly touched in April, but where it spent more time a year ago, as it seems to be heading to 1.05 and below.  Meanwhile, JPY (-0.8%) is also feeling the heat while NOK (-0.7%) is pressured by both the dollar’s general strength and the oil weakness.  In the EMG bloc, MXN (-1.3%) is having a rough go as the tariff talk heats up, but we have also seen weakness in EEMEA with ZAR (-1.4%), PLN (-1.0%) and HUF (-1.2%) all under pressure this morning.  Not to be outdone, Asian currencies, too, are selling off with CNY (-0.3%) back above 7.20 for the first time since August while THB (-0.9%), MYR (-0.7%) and SGD (-0.6%) demonstrate the breadth of the move.

With the holiday, there is no data to be released today, but this week brings CPI amongst other things.

TuesdayNFIB Small Biz Optimism91.9
WednesdayCPI0.2% (2.6% Y/Y)
 Ex food & energy0.3% (3.3% Y/Y)
ThursdayPPI0.2% (2.3% Y/Y)
 Ex food & energy0.3% (2.9% Y/Y)
 Initial Claims224K
 Continuing Claims1895K
FridayRetail Sales0.3%
 -ex autos0.3%
 Empire State Mfg-1.4
 IP-0.3%
 Capacity Utilization77.2%

Source: tradingeconomics.com

In addition to this data, we hear from 11 different Fed speakers this week, including Chairman Powell again at 3:00pm on Thursday afternoon.  It is difficult to believe that the message from last week is going to change, but you never know.  However, I expect that every one of them is going to be explaining that things are good, but they are cutting rates to ensure things remain that way as they consistently congratulate themselves on having slain inflation.  I hope they are right…I fear they are not.

For now, though, the US economy remains the strongest in the world (7% budget deficits will help prop up growth after all) and capital continues to flow in this direction.  I see no reason for the dollar to fall anytime soon.  Whatever problems lie ahead, I believe they are over the metaphorical horizon and other than a few doomporn purveyors, not in the market’s view.

Good luck

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Clueless

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The risks to our mandates appear
More balanced so let us be clear
We’re still cutting rates
Which just demonstrates
We’re clueless and shaking with fear

 

To absolutely nobody’s surprise, the Fed cut the Fed funds rate by 25bps yesterday.  The accompanying statement explained, “The Committee judges that the risks to achieving its employment and inflation goals are roughly in balance.”  The implication is that they remain confident that inflation is slowly heading to their 2.0% target, and they are keeping a close eye on the Unemployment Rate, especially after the terrible number last week.  Of course, the combination of the Boeing strike and the impact of the two major hurricanes, Helene and Milton, were likely responsible for a significant portion of that underperformance, so we will need to see how the November report, published on December 6th plays out.  There is a lot of time between now and then so the narrative could easily change prior to the release.  Be vigilant.

The press conference consisted of a lot of self-congratulatory comments about how they have done a good job “recalibrating” policy and continuing to insist inflation is dying, although not quite dead yet.  The market response was to continue the US equity rally, with the NASDAQ (+1.5%) leading the way higher and to reverse some of yesterday’s bond losses with 10-year yields slipping -8bps.  In the commodity markets, yesterday saw all of them rebound, recouping roughly half of their losses from Wednesday and the dollar gave back some of those initial gains as well.

At this stage, the market is pricing a two-thirds probability of another 25bp cut at the December meeting, and all eyes are now going to turn to Trump and whatever policy prescriptions he starts to tout.  The early indication is that people expect more growth in the US from his policies as the no-landing scenario seems to be the favorite.  We shall see.

Investors had high hopes that Xi
Would give away more renminbi
Instead, in a flop
They’ve spurred a debt swap
While stimulus, no one can see

The other story of note overnight was the final statement of the Standing Committee in China, where many had expected hoped the elusive Chinese Bazooka would be fired.  It was not.  Instead, they gave more details on an effective debt swap that they will permit for local governments.  

A brief tutorial: Chinese cities and regions had typically financed infrastructure investment via local government funding vehicles (LGFV) which issued debt to investors that was backed by the government entity, but not officially on their balance sheet.  This model evolved because there were restrictions on how much debt these cities/regions were allowed to issue.  These entities would then sell land to developers to service and pay off the debt.  It all worked great while the property bubble in China was inflating and nobody was the wiser.  But now that property prices have been falling for 3 years, it is a major problem because the cities/regions aren’t generating the property sales and revenues needed to repay the debt.  

The solution that Xi came up with is to allow the cities/regions to issue debt on the balance sheet, upwards of CNY 10 trillion over the next 5 years, and replace the off-balance sheet stuff from the LGFVs.  And that’s it!  A debt swap that will likely lower interest rates slightly and save somewhere along the lines of CNY 600 billion over 5 years.  While the central government claims there is only a total of CNY 14.3 trillion in these LGFVs, most analysts put the number at around CNY 60 trillion.  This is not really that stimulative, will not help Chinese consumers nor factories in any way, and is very likely to have only a tiny impact. 

Cagily, the Standing Committee didn’t announce this until after local markets closed for the weekend, so the fact that stocks on the mainland and in Hong Kong only fell -1.0% does not represent the totality of the disappointment.  I expect we will see further declines next week.  President Xi has some tough sledding ahead for his economy.

And that was really the news of note.  Literally everything else you can read is a post-mortem of the election.  So, let’s look at how markets behaved overnight.  Away from the Chinese share declines, there were more winners than losers in Asia, with those nations that seem to have closer ties to the US benefitting (Taiwan, Australia, Singapore, New Zealand) while others which are more neutral or in China’s sphere of influence under pressure (India, Thailand, Vietnam).  The other noteworthy news was that the Chinese Current Account hit its second highest surplus ever last month, but with most people expecting significant tariff implementation when Trump takes office in January, I suspect those numbers will decline.  

Meanwhile, European bourses are almost entirely under water this morning with most lower by -0.9% although Spain’s IBEX is unchanged on the day.  There hasn’t been much in the way of new data, and I sense that investors are starting to price in more difficult relations with the US now that it seems clear the Republicans will win the House as well, giving Trump the ability to implement his vision.  Meanwhile, at this hour (6:50) US futures are little changed, consolidating ahead of the weekend.

In the bond market, yields which backed off in the wake of the FOMC meeting yesterday have edged 2bps lower this morning and are now sitting at 4.30%. This is the level, when first reached a week ago, set hair on fire as to the dichotomy between the Fed cutting rates and longer-term yields rising.  My view continues to be that yields have higher to climb over time as the Fed’s inflation fight is not won, and it will become evident that is the case going forward.  As to European sovereign yields, they are all lower by -4bps this morning as they are simply following Treasury yields but had to catch up given the FOMC meeting occurred after their close yesterday.

In the commodity markets, it appears that nobody wants to own ‘stuff’ anymore as they are back under real pressure.  Oil (-1.4%) is sliding although that makes sense as a Trump administration is very likely to support as much production as possible thus increasing supply.  But metals prices are also under pressure (Au -0.5%, Ag -1.5%, Cu -2.2%) which makes less sense as if economic expansion is the view, I would expect these to perform well.  Of course, it is possible that this is a reaction to the damp squib from China last night, but I expect these items to gradually regain lost ground.

Finally, the dollar is gaining some strength this morning, rising against most of its G10 counterparts with AUD (-0.6%) the worst performer, although JPY (+0.5%) and CHF (+0.2%) have managed to climb.  It’s almost as if this is a classic risk-off scenario in the FX markets.  Certainly, EMG currencies are under pressure this morning with ZAR (-1.1%) the laggard, but declines across the board, notably CNY (-0.3%) and pushing back toward the 7.20 level.  But the dollar is strong everywhere in this bloc.  

On the data front, Michigan Sentiment (exp 71.0) is all we get this morning although we also get our first Fed speaker, Governor Bowman, who has been one of the more hawkish voices.  One other thing to note is that the FAO’s Food Price Index was released this morning, climbing 2% to 127.4.  as you can see from the chart below, while this is not as high as prices reached in the immediate aftermath of the Russian invasion of Ukraine, this level is still in the upper echelons of where things have been over the past thirty-four years.

Source: tradingeconomics.com

It is worth remembering that the Arab Spring in 2011 was partially driven by rising food prices with large scale protests upending several governments.  Given how unhappy people around the world have been with their leadership, as evidenced by the number of governments that have been kicked out of office in recent elections and given that rising food prices have been a constant complaint, this needs to be kept in mind for how events unfold in the future.  To me, the market implication is that more volatile politics around the world will feed into more volatile financial markets as uncertainty grows.  In times of stress, the dollar remains the haven of choice, so this is just another reason to keep looking for the dollar to outperform in the medium term.

Good luck and good weekend

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The Throes of Anguish

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The answer this morning is clear
The president starting next year
Is Donald J Trump
Who always could pump
Excitement when he did appear

The market response has been swift
With equities getting a lift
The dollar, too, rose
But bonds felt the throes
Of anguish while getting short shrift

The punditry was quite convinced that it would be a long time before the results of the election were clear as they anticipated significant delays in the vote count in the battleground states.  Fears were fanned that if Trump were to lose, he wouldn’t accept the election.  As well, virtually every pundit in the mainstream media portrayed the race as “tight as a tick’ (a somewhat odd expression in my mind).

But none of that is what happened at all.  Instead, somewhere around 3:00am NY time, Donald J Trump was called the winner of the presidential election, effectively in a landslide as he appears set to win > 300 electoral votes and, perhaps more importantly as a signal, the popular vote, and will be inaugurated as the 47thpresident of the United States on January 20th, 2025.  Congratulations are in order.

It ought not be surprising that the ‘Trump trade’ is back in full force early on with US equity futures rallying about 2%, Treasury bonds selling off sharply with 10-year yields jumping 20bps and the dollar exploding higher, jumping by about 1.5% as per the DXY, with substantial gains against virtually all its G10 and EMG counterparts.  Oil prices are under pressure as the prospect of ‘drill, baby, drill’ is the future and Bitcoin has exploded higher to new all-time highs amid the prospects of a pro-crypto Trump administration.

Much digital ink will be spilled over the next weeks and months as the punditry first tries to understand how they could have been so wrong, and then tries to create the new narrative.  However, if we learned nothing else from this election it is that the previous narrative writers, especially the MSM, have lost a great deal of sway and that it will be the new narrative writers, those independents on X and Substack and podcasters, who don’t answer to a corporate master, who will be leading the way imparting information and stories.  I’ve no idea how this will play out with respect to financial markets, but I am confident it will have an impact over time.

With all of the votes being tallied
While stocks and the dollar have rallied
We’ll turn to the Fed
Who soon will have said
On rate cuts, we’ve not dilly-dallied

With the election now past, at least as a point of volatility, all eyes will likely turn to the FOMC meeting, which starts this morning and will run until the statement is released tomorrow at 2pm with Chairman Powell’s press conference coming 30 minutes later.  The election result has not changed any views on tomorrow’s rate cut, with futures markets still pricing in a 98% probability, but the pricing as we look further out the curve has changed a bit more.  For instance, the December meeting is now priced at less than a 70% probability for the next 25bps, and if we look out to December 2025, the market has removed at least one 25bp cut from the future.

This makes sense based on the idea that a Trump administration is going to be heavily pro-growth and one consequence will potentially be more inflationary pressures.  Of course, if energy prices decline, that is going to help cap inflation, at least at the headline level, so the impact going forward is very hard to discern at this time.  As well, if that pro-growth agenda helps improve the employment situation, the Fed will be far less compelled to cut rates further.  In fact, the only reason to do so at that time would be to address the massive debt load and that cannot be ruled out, but my take is Powell is not inclined to try to help President Trump in any way, so will likely feign allegiance to the mandate when the situation arises.

But with all the election excitement today, my sense is the Fed is tomorrow’s market discussion, not today’s.  Rather, let’s see how markets around the world have responded to the news.

It seems that yesterday’s US markets foretold the story with a solid rally across the board.  Overnight, Japanese shares (+2.65%) were beneficiaries as the yen (-1.7%) weakened sharply along with all the other currencies.  Elsewhere in the region, China (-0.5%) and Hong Kong (-2.2%) both suffered on prospects of more tariffs coming and Korea (-0.5%) was also under pressure, but almost every other regional exchange rallied nicely.  As to Europe, green is the predominant color with the DAX (+0.9%), CAC (+1.5%) and FTSE 100 (+1.2%) all performing well although Spain’s IBEX (-1.5%) is underperforming allegedly on fears of some tax issues that will impact the Spanish banking sector.  But I would look at Spain’s Services PMI falling short of expectations as a better driver.

In the bond market, while US yields have rocketed higher as discussed above, in Europe, that is not the case at all.  Instead, we are seeing declines of between 4bps and 5bps across the continent as concerns grow that Eurozone economic activity may suffer with Trump in office as threats of tariffs rise.  The market has now priced in further rate cuts by the ECB and that seems to be the driver here.

Aside from oil prices falling, metals, too, are under severe pressure with the dollar’s sharp rally.  So precious (Au -1.3%, Ag-2.3%) and industrial (Cu-2.8%, Al -1.0%) are all selling off.  Now, this space has seen a strong rally overall lately so a correction can be no real surprise.  However, it strikes me that if the growth story is maintained, demand for industrial metals will expand and gold is going to find buyers no matter what.

Finally, the dollar just continues to rock, climbing further since I started writing this morning.  the biggest loser is MXN (-2.9%) which has fallen to multi-year lows amid concerns they will be an early target of tariffs.  While the dollar, writ large, is stronger across the board today, it is only back to levels last seen in July, hardly a massive breakout.  However, do not be surprised if this rally continues over time as investors learn more specifics of how President Trump wants to proceed on all these issues about the economy, taxes and tariffs.

The only meaningful data releases this morning are the EIA Oil inventories, which last week saw a large draw and are expected to see a further one today.  Otherwise, European Services PMI data, aside from Spain’s disappointing showing, was actually better than expected, probably helping equity markets there as well.  Of course, as the Fed doesn’t come out until tomorrow, there is no Fedspeak so traders will likely continue to push the Trump trade for now.  As such, look for the dollar to remain strong until further notice.

Good luck
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This is the Vibe

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In DC, the IMF tribe
Is meeting, and this is the vibe
Leave China alone
While they all bemoan
Das Trump to whom, problems, ascribe
 
Meanwhile in Beijing, Xi’s delayed
His policies as he’s afraid
If Trump wins the vote
More tariffs, he’ll float
Reducing Xi’s winnings in trade

 

With the US election fast approaching, it appears that virtually every aspect of life now hinges on the outcome.  This is even true in ostensibly neutral NGOs like the IMF.  As an example, the title of this Bloomberg article, Trump 2.0 Haunts World Economy Chiefs Gathering in Washington Before Vote is enough to make you question the neutrality of both Bloomberg and the ongoing activity at the IMF.  Briefly, in this article, the authors quote several meeting participants explaining that a Trump victory could disrupt the current global “stability” in trade.  (I’m not sure why they think the current situation is stable given the ongoing increases in tariffs already being implemented by the Eurozone as well as the US vs. Chinese manufactured goods, but they all are certain it will be a problem only if Trump is elected.)

In fact, earlier this week, the IMF explicitly said that a Trump victory would be negative for the global economy and that his policies would be worse for the US as well when compared to Harris’s policies.  My first thought is, how do they know Harris’s policies as she hasn’t been able to articulate any, but second, the idea that a supranational organization would express its electoral preferences leading up to a major national vote is remarkable.  Clearly the concept of neutrality no longer exists.

At any rate, as I explained yesterday, the US election remains THE topic on both investors’ and traders’ minds.  As well, it is THE topic on every other government’s mind around the world.  As such, arguably until the vote is complete and a victor declared, I suspect that all markets will see plenty of volatility with each change in the polls but limited additional secular movement.

One of the ongoing activities that passes for analysis these days is the forecasting of future bond yields or equity returns based on the winner.  This is generally explained as this market will rise if one wins and fall if the other does, or vice versa.  My take is this is simply another way for analysts to proffer their political views under the guise of economic analysis and as such, while I get a chuckle from these earnest descriptions of the future, I certainly don’t see them as rigorous analysis.  

But really, this week, that is all that is happening.  Next week, we do see a lot of data, including the NFP report as well as PCE readings and the BOJ’s interest rate decision, so perhaps there will be more market focused discussion.  But right now, virtually everything you read revolves around the election and the possible results.

So, with that in mind, let’s take a look at what happened overnight.  Yesterday’s mixed US session, with the DJIA slipping while the other major indices rallied a bit, led to a mixed picture in Asia as well.  Japanese shares (-0.6%) suffered a bit as Japan, too, is heading toward a general election and questions about whether new PM Ishiba will be able to win a majority in the Diet are very real this time.  Apparently, even in a homogenous society like Japan, there are questions about the ruling party and how much it is focused on helping the population.  As to the rest of Asia, both China (+0.7%) and Hong Kong (+0.5%) managed modest gains, but there are still many questions as to exactly how much stimulus China is going to inject into the economy there.  In fact, you can see the market asking those questions by the chart below, where the spike was the initial euphoria that something was going to be done, and the retracement is the realization that it was hope and not policy that drove things.

Source: tradingeconomics.com

The numbers show that after a >30% rally in a few sessions, investors have unwound about one-third of the climb as they await the outcome of the National People’s Congress meeting to see if a new fiscal package will be approved.  (Cagily, they have set the dates for the meeting to be November 4-8 to make sure that they can encompass the outcome of the US election in their decisions.  The rest of Asia saw a mix of gainers (Taiwan, Philippines, Australia) and laggards (India, Singapore, Malaysia) with other markets barely moving.

Meanwhile, in Europe, this morning is a down day, although the losses are quite modest (CAC -0.3%, IBEX -0.4%, FTSE 100 -0.2%) as traders head into the weekend with limited confidence on how things will play out going forward.  As to the US, at this hour (7:30), futures are pointing slightly higher, 0.2% or so.

In the bond market, Treasury yields (-2bps) have backed off their highs from earlier in the week but remain far above the levels seen prior to the Fed’s rate cut in September.  A view growing in popularity is that the 10yr yield will rise above 5.0% if Trump is elected while it will decline to 3.5% in a Harris victory.  Personally, I cannot see any outcome that doesn’t boost yields as there seems to be scant evidence that either side will slow spending and the Fed has made it clear that higher inflation is ok, at least by their actions, if not yet by their words.  As an aside, I couldn’t help but notice comments from Secretary Yellen explaining that the budget deficit was getting out of hand and “something” needed to be done about it, as though she had no part in the situation!  Meanwhile, European sovereign yields are mostly edging higher this morning, but only by 1bp or 2bps, as they continue to hold onto the gains that came alongside the Treasury market.  In the end, Treasury yields remain the key global driver.

In the commodity markets, oil (+0.7%) is bouncing slightly this morning after yesteray’s decline.  The talk in the market is that the Saudis are considering opening a price war to regain market share after they have withheld so much production.  That would certainly be a different tack than their recent activities and I imagine that President Putin would not be pleased, but that is one rumor.  As to the metals markets, they are under pressure this morning with all the major metals somewhat softer (Au -0.2%, Ag -0.9%, Cu -0.2%) as we continue to see profit taking in the space after a very large run higher over the course of the entire year.

Finally, the dollar is little changed overall this morning with no G10 currency having moved even 0.2% since the close yesterday although we have seen a couple of EMG currencies (KRW -0.7%, ZAR +0.3%) with a little dynamism.  The won fell further after weaker than forecast GDP encouraged traders to look for further rate cuts by the BOK while the rand’s movement appears more trading than fundamentally focused as there was neither data nor commentary to drive things.

On the data front, this morning brings Durable Goods (exp -1.0%, ex Transport -0.1%) and Michigan Sentiment (69.0).  As explained above, the data doesn’t seem to matter right now with all eyes on the election.  There are no Fed speakers scheduled but it is not clear that all their chatter this week had any impact.  The market is still pricing a 25bp cut in November and a 75% probability of another one in December, which is what it has been doing for a while.

It is very difficult to observe recent market activity and come away with a strong directional view.  My take continues to be that the December rate cut will lose its support based on the data and the dollar will appreciate accordingly.  But right now, that is a minority view.

Good luck and good weekend

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Pulling All-Nighters

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As Harris and Trump try persuading
The voters, the markets keep trading
So, narrative writers
Are pulling all-nighters
To pump up the side that is fading
 
The latest attack is on Trump
Who’s blamed for the bond market slump
But what of the Fed
Whose rate cuts have spread
The fear that inflation will jump?

 

It appears we have reached the point in time when macroeconomic data is taking a backseat to the political situation.  Almost every story you can read in any of the mainstream media right now is about how the election is going to affect whatever subject an article is about.  The latest discussion, which I have seen across numerous sources like Bloomberg, the WSJ and Reuters, just to name a few, is that the bond markets recent decline is entirely Trump’s fault.  The logic is that as Trump’s election prospects improve, and those of fellow Republicans in both the House and Senate alongside him, the market is suddenly concerned that the government is going to spend a lot of money and run a large deficit.  You can’t make this up!

The federal government deficit under the current administration is pegged to be just shy of $2 trillion this fiscal year, and you have all heard about the fact that interest payments on the government’s nearly $36 trillion of debt have grown to be more than $1 trillion.  But that is not the driver according to the narrative.  The driver is the idea that the Republicans could sweep and that would mean large deficits because…Trump.

Now, I realize I am only an FX guy (FX poet I guess), but my rudimentary understanding of economics is that when economic activity is strong (like the current data implies) and the central bank then adds more liquidity to the system to goose demand, say by cutting interest rates in the front end of the curve, then demand can outstrip supply and prices will rise.  As such, bond investors, when they see a dovish Fed entering an easing cycle while economic activity continues to move along and the government is already running a large fiscal deficit, are concerned over higher inflation ahead and so demand higher yields to own Treasury securities.  Of course, that view doesn’t necessarily suit the narrative so desperately pushed by the mainstream media that Trump is the root of all evil, but it does seem to make more sense.

At any rate, for the next two weeks at least, and likely four years if Trump wins, I can assure you that every negative day in any financial market will be blamed on Trump and his policies, despite the fact that the Fed seems to be the one with far more direct impact on short-term economic outcomes.  A look at the below chart, showing 10yr Treasury yields and the Fed funds rate cannot help but show that it was the Fed’s rate cut that is coincident with the recent sharp rise in yields, and this took place long before the odds of a Trump victory improved.  Look through the narrative and instead at the data and Fed activities for the most important clues as to what is actually happening.  I would argue that this is a bond market that is concerned about returning inflation as the Fed’s policy prescription no longer matches the reality on the ground.

Source: tradingeconomics.com

One other thing.  If the Fed does continue to cut rates while US economic data continues to demonstrate solid growth, look for commodity prices to continue their ongoing rally, likely equity markets to continue to perform well, but the dollar is more nuanced as rising inflation ought to undermine the greenback, but given we are seeing more aggressive rate cuts elsewhere in the world (Bank of Canada just cut 50bps this week and the ECB and BOE are going to be cutting again next month), it is entirely possible the dollar holds its own despite macroeconomic fundamentals that should point to weakness.

Ok, let’s see what happened overnight.  Yesterday’s US sell-off, the third consecutive day of broad market weakness, seems to have been sufficient to wash out some of the froth in the market as US futures are pointing higher this morning, especially after Tesla’s better than expected earnings report.  But overnight, the trend from yesterday’s US session was intact with most Asian markets under pressure (Hang Seng -1.3%, CSI 300 -1.1%, KOSPI -0.7%) with only Japan (Nikkei +0.1%) bucking the trend.  In Europe, however, this morning’s color is green with all the major bourses showing life (CAC +0.75%, DAX +0.7%, FTSE 100 +0.5%). Now, there was data released in Europe with the Flash PMI readings out this morning.  The funny thing is that they did not paint a great picture, with continued softness almost everywhere.  My take is Europe is going through a ‘bad news is good’ phase where the weak PMI data implies there will be more aggressive rate cuts by the ECB going forward.  Certainly, Eurozone economic activity, led by Germany’s virtual stagnation, is lackluster at best.

In the bond markets, after several sessions of rising yields, Treasuries have seen yields slip back 5bps this morning with similar declines across the board in European sovereign markets.  Part of this is the weak PMI data I believe, but part of it is a simple trading response to a market that is likely somewhat oversold.  After all, for the past month, bonds have been under significant pressure so a bounce can be no surprise.

In the commodity markets, after yesterday’s rout, where there seemed to be a lot of profit taking of the recent rally, this morning the march higher continues.  Oil (+1.0%) is leading the energy complex higher and the entire metals complex (Au +0.5%, Ag +0.7%, Cu +0.5%, Al +0.9%) is back in gear as all the underlying drivers (rising inflation, solid demand, and for gold, ongoing geopolitical concerns) remain in place.

Finally, the dollar is a bit softer this morning, but this too seems like a response to what has been a strong rally.  Once again, using DXY as a proxy (see chart below) for the broad dollar, the rally over the past month has been quite strong, so a day of backing off is to be expected.  As I mentioned above, the future of the dollar is nuanced because while the macro indicators point to potential weakness, if the rest of the world eases monetary policy more aggressively, the dollar will still rally.

Source: tradingeconomics.com

As to today’s movement, currency gains have been between 0.2% and 0.5% with the commodity bloc the biggest beneficiary (ZAR +0.5%, NOK +0.4%, AUD +0.3%) and we have also seen the yen (+0.5%) regain a little of its footing amid declining US yields, although it remains far above the 150 level.  There are those who are looking for another bout of intervention, but I am not in that camp, at least not in the near-term.

On the data front, this morning brings the Chicago Fed National Activity Index (exp 0.2), Initial Claims (242K), Continuing Claims (1880K), Flash PMI (Mfg 47.5, Services 55.0) and New Home Sales (720K).  Yesterday’s Existing Home Sales data was weaker than expected at 3.84M, arguably a testament to the fact that mortgage rates have followed Treasury yields higher and are back above 7.0% again.  On the Fed front, we hear from new Cleveland Fed president Beth Hammack, but it feels like Fed speak is losing some momentum.  Nobody believes that they are going to stop cutting rates, and fewer and fewer analysts think they should continue amid strong growth.  The futures market is now pricing a 95% probability of a November cut but only a 71% probability of a December cut to follow.  I remain in the camp that they pause in December, especially in the event of a Trump victory.

While the dollar is under pressure today, I continue to believe it retains the ‘cleanest shirt in the dirty laundry’ appeal and will ultimately continue to rally.  

Good luck

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Feelings of Doubt

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Two candidates took to the stage
But neither of them could assuage
The feelings of doubt
‘bout how things turn out
And how we can all turn the page
 
Meanwhile there’s news south of the border
Where AMLO, the courts, did reorder
This has raised some fears
That in coming years
The nation will lack law & order

 

Before I start, please take a moment to remember those 2,977 nnocent lives lost on this horrible day 23 years ago, this generation’s day of infamy.

Now, on to the market discussion.  I don’t know about you, if you watched the debate, but frankly I was pretty bored and disappointed by the whole thing.  I heard many platitudes from both sides, many accusations from both sides, and couldn’t help but notice how the moderators interjected themselves consistently in favor of Vice-president Harris via their “fact-checking”.  All in all, I don’t think we learned that much, although Harris is certainly more coherent than Biden was.  My guess is that very few undecided voters changed their minds.  As to the market’s reaction, perhaps the only notable result was that gold rallied slightly as no matter who wins the election, the idea that fiscal prudence is on the agenda remains anathema to both sides.  Equity futures were slightly lower when the debate started, and still slightly lower when it ended, as well as this morning.  It ought not be surprising as the impact of politics on equity markets has always been unclear in the short run.

The other political story of note was that in Mexico, AMLO, who remains president for a few more weeks, was able to finally get the change to the constitution he has been seeking his entire term, which now allows for judges, including supreme court justices there, to be elected rather than appointed.  The concern is that this will politicize the judicial system.  An independent judiciary is a key ingredient for international investors as they seek some comfort that business decisions can be fairly considered.  However, judicial elections may call that into question and that is likely to have a longer-term negative impact on the Mexican economy.  As you can see from the chart below, the peso has been massively underperforming since April, falling more than 22% and breaching the 20.00 peso level for the first time in more than 2 years, as concerns over this issue have grown.  Add to this the fact that inflation in Mexico has drifted slowly lower and expectations are rising for more aggressive rate cuts by Banxico, and you have the recipe for a weaker currency.  While the peso has bounced 0.9% this morning, this trend lower remains clear for now.

Source: tradingeconomics.com

With all that out of the way, it is time to turn to this morning’s big news, the August CPI report.  Current median expectations are for a 0.2% M/M, 2.6% Y/Y rise in the headline number and a 0.2% M/M, 3.2% Y/Y rise in the ex-food & energy reading.  However, I have seen estimates ranging from 0.0% M/M to 0.3% M/M based on various subcomponents like used cars, apparel and shelter.  Ahead of the release, I have no further information than that, but let’s consider what can happen in either situation.

First, we know that the Fed is going to cut rates next week, regardless of the number today.  Currently, the Fed funds futures market is pricing a 29% probability of a 50bp cut.  A quick look at the below table from the CME shows this is close to the lower end of the range of expectations over the past month, which back in August were at 51%.

source: cmegroup.com

The current working assumption seems to be that a soft number will virtually assure a 50bp cut regardless of any other economic data, while a 0.3% print will lock in a 25bp cut.  Once again, given the apparent resilience of the economy, the rationale for cutting rates aggressively remains elusive.  The cynic in me might point to the fact that Chairman Powell is a private equity guy, someone who made his fortune in that space, and he has been receiving pressure from all his old friends and colleagues to cut rates to help resurrect the sales activity in that market.   While that may seem glib, given the way things work in the corridors of power in Washington, it cannot be ruled out.  However, history has shown that when the Fed begins a cutting cycle with 50 bps, it is generally because they are behind the curve and recession is already here.  If that is the situation, while next week a 50bp cut may be well received by equity investors, the medium-term outlook is not nearly as bright.  At this point, the question is, how will markets respond to the data.

Let’s start with looking at how things behaved overnight.  Yesterday’s mixed US session, with the DJIA slipping while both the S&P and NASDAQ rallied was followed by uniform weakness in Asia.  Perhaps nobody there was enamored of the debate, which was taking place while those markets were open, but we saw the Nikkei (-1.5%) fall sharply with weakness also in the Hang Seng (-0.75%) and CSI 300 (-0.3%). In fact, only Singapore (+0.5%) managed any gains during the session with every other regional market declining.  But that is not the story in Europe, where all markets are higher, albeit not that much higher.  Spain’s IBEX (+0.65%) is the leader with other markets showing gains of between 0.1% (FTSE 100) to 0.3% (DAX).  For those who are concerned that a Trump victory may isolate Europe more than a Harris victory, perhaps there was more encouragement she could win after the debate.

In the bond market, after some significant declines in yields yesterday, where Treasury yields fell nearly 10bps, this morning they have fallen a further 2bps and are now back to their lowest level since June 2023.  At 3.6%, nearly 200bps below Fed funds, the bond market seems to be pricing in a recession.  Interestingly, neither stocks nor credit spreads are pricing that same outcome.  European sovereign yields also fell sharply yesterday, although not as much as Treasury yields, more like 5bps, and this morning they are a bit lower again, somewhere between -1bp and -3bps.  Perhaps the most interesting outcome is that JGB yields have slipped 4bps, once again delaying the idea that the BOJ is going to tighten policy soon.

In the commodity markets, oil (+2.6%) has rebounded sharply this morning as concerns over Hurricane Francine shutting in Gulf of Mexico production rise ahead of expected landfall later today.  However, the trend here remains lower as demand concerns remain front and center and supply continues to grow.  My sense is that the declining demand is a signal that economic activity is slowing, but it will return with a return to more robust global growth.  In the metals markets, everything is back in the green with gold (+0.2%) once again pushing toward its recent all-time highs, while both silver and copper show strength this morning.  I believe those moves are related to the anticipation of larger cuts by the Fed and other central banks coming soon.

Finally, the dollar is under pressure across the board this morning, also playing along with the theme of the Fed cutting rates more aggressively going forward.  In fact, literally every currency in both the G10 and EMG blocs are stronger today with most modestly so, on the order of 0.2%, although we have seen MXN (+0.85%) rebounding from its recent declines discussed above, and ZAR (+0.45%) benefitting from the strength in metals markets.

Aside from the CPI data, the only other news is the EIA oil inventories, where last week saw a large draw overall, and the only forecast I see is for a modest build of <1mm barrels.  However, CPI will determine today’s price action.  I think we are in a ‘good news is good’ scenario so a soft number should see a rally in stocks, bonds and commodities while the dollar suffers further.  On the flip side, a high print should see the opposite reaction.

As I reread my note, it appears to be an accurate description of the fact that there are features in the data pointing to further economic strength and other pointing to weakness.  Truly, nobody knows what lies ahead.

Good luck

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Fight!

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When fired upon, his response
Was jumping back up at the nonce
His cry was to “Fight!”
And some on the right
Now claim he’s a man, renaissance!

 

As John Lennon told us in 1977:

Nobody told me there’d be days like these
Strange days indeed

While this poet tries to keep politics largely out of the discussion, during these strange days, it is THE story of note.  Of course, by now you all not only have heard of the assassination attempt on former President Trump’s life on Saturday at a political rally in Butler, PA, but you all almost certainly have your own opinions about all the different theories, conspiracy and otherwise, so I will not go down that road.  I will simply note that it speaks poorly of the current political zeitgeist.  And while cooler heads are calling for a step away from the abyss, I have not yet seen the public take that step backwards.  Maybe soon.

In the meantime, my efforts are designed to help make sense of how both the political and economic storylines may impact the markets, and correspondingly, try to help those of you who need to hedge financial exposures, with a little understanding.  But history shows, when politics leads the news, the degree of difficulty goes up significantly.

The first thing to note is that sometimes, when momentous things occur in the real world, any financial implications take some time to manifest themselves.  With that in mind, I thought I would take a 30,000 foot view of the macroeconomic situation as we head into the new week.

The data of late calls into question
If we are now in a recession
With joblessness rising
And prices downsizing
Perhaps growth is seeing regression
 
And it’s not just here in the States
Where growth appears in dire straits
In China, as well,
Things have gone to h*ll
As data of late demonstrates

The question that is being asked more frequently is, are we currently in a recession?  While the data that has been released of late has been slowing, in the US it has not generally reached levels consistent with inflation, although there are some outliers that do point in that direction.  For instance, Friday’s Michigan Sentiment reading was pretty lousy at 66.0, well below expectations, and as can be seen in the below chart from the FRED data base, seemingly heading toward, if not already at, levels consistent with recessions (gray shaded areas).

Source: FRED Data base

As well, a look at the Citibank Economic Surprise Index, an index that tracks the difference between the actual data releases and the consensus forecasts ahead of time, shows that data is consistently failing to meet expectations.

Source: Yardeni.com

Here, too, the data does not appear to have quite reached levels seen in the previous two recessions, but recall that those two recessions were not garden-variety, with the GFC the deepest recession since the global depression in 1929, and the Covid recession remarkably short and sharp in the wake of the unprecedented government shutdowns that occurred in early 2020.  But going back in time, it is generally true that if data released consistently underperform expectations, it is a signal of overall economic weakness.

There are many other data points that are showing similar tendencies like the Unemployment Rate, which I have discussed lately, and is gaining momentum in its move higher.  As well, a look at almost all production factors or Retail Sales, which are reported in nominal terms, shows that when they are deflated by the inflation data of the past several years, real activity has been minimal or even declining.  A look at the below chart shows Retail Sales in both nominal and real terms with the latter actually declining since 2021 despite the rising nominal figures.  In other words, people are simply paying more for the same amount or less of stuff.

Source: brownstone.org

And this is not just a US situation.  As is typically the case, if the US is slowing, the rest of the world is going to suffer given its place as both the largest economy overall, and the largest mass consumer of everybody else’s stuff.  So, last night when China released its latest data, it showed the Q2 GDP disappointed, printing 4.7% while Retail Sales rose only 2.0%, far below Industrial Production, which grew 5.3%.  

Source: Bloomberg.com

In fact, this chart is the graphic representation of why nations around the world are calling for more tariffs on Chinese goods.  The combination of a still-collapsing property market there with the absence of significant government stimulus and a massive debt overhang has led President Xi to seek to increase industrial output and exports (remember the trade data from last week where exports soared, and imports actually declined) thus flooding other markets with goods and harming local manufacturing in other nations.  This is merely one more issue that policymakers must navigate amid a growing global concern over both political and economic unrest.

Summing it all up, I believe the case for there being a recession is growing strongly, and while nominal GDP is likely to remain positive, especially in the US given the government’s nonstop spending spree, real economic activity is suffering.  This has major implications for markets, especially as they appeared to still be priced for that perfect 10-point landing.  As I have written consistently, if (when) things turn more sharply, the Fed will respond quickly and cut rates and the impact on markets will be significant, especially for the dollar which will almost certainly decline sharply.  Just be nimble here.

I am sorry for the extended opening, but obviously, there is much ongoing.  So, let’s take a look at how things are behaving this morning.  At the opening of trading on Sunday evening, arguably the market that was showing the most impact was FX, where the dollar, which had fallen sharply at the end of last week in the wake of that CPI data, had rebounded a bit.  The narrative seems to be that the assassination attempt will secure President Trump’s reelection and the dollar will benefit from the economic policies that are believed to come with that.  As well, at this hour, (6:30) we are seeing US equity futures rallying, up 0.4% across the board.  That’s quite the contrast with the overnight session where the Nikkei (-2.5%) came under severe pressure as investors grow concerned over potential JPY strength.  Too, the Hang Seng (-1.5%) fell sharply although mainland shares have behaved better, little changed overnight, as investors look toward the Third Plenum with hopes that President Xi will unveil something to help the Chinese economy.

In Europe, though, this morning sees red across the screens, albeit not dramatically so.  The CAC (-0.4%) in Paris and the IBEX (-0.5%) in Madrid are the laggards, unwinding some of last week’s rebound, but every major market is under pressure this morning.  The lone piece of data released was Eurozone IP (-0.6%) which fell back into negative territory for the 6th time in the past twelve months.  Certainly, this is not pointing to a robust economy in Europe.

In the bond market, Treasury yields have backed up 4bps, also on the “Trump” trade, as investors believe that a Trump victory will result in more aggressive growth policies and higher US yields.  However, in the Eurozone, and in Asia, government bond yields are essentially unchanged from Friday’s levels as I don’t think foreign investors know what to think now about the US and how it may impact other nations going forward.  After all, if the US does grow more quickly in response to a Trump victory, will that mean more or fewer opportunities for tariffs and other mechanisms to affect foreign nations?

In the commodity markets, things are quiet with oil essentially unchanged this morning, as it consolidates at its recent highs.  Market technicians are looking for a break above $85.00/bbl, but I think that will require some substantially better economic data, which as explained above, does not seem to be in our immediate future.  In the metals markets, precious metals are little changed with gold consolidating above the $2400/oz level near its recent all-time highs, although copper (-0.9%) and aluminum (-0.8%) are both under pressure on the weaker economic picture.

Finally, the dollar is little changed overall this morning from Friday’s levels.  The early dollar strength seen last night has ebbed a bit although we still are seeing some strength against peripheral currencies like ZAR (-1.2%), NOK (-0.5%) and SEK (-0.5%).  The rand story seems to be more about local politics and the inability to get the new government up and running, while deeper investigation into the Skandies shows that this is a phantom move based on an unusual close on Friday.  My sense is there has really been no net movement here, as we have seen in the euro and the pound, both of which are mere pips from Friday’s closing levels.

On the data front this week, there is some important news as well as a series of Fed speeches starting with Chairman Powell this afternoon at 12:30.

TodayEmpire State Manufacturing-6.0
TuesdayRetail Sales0.0%
 -ex autos0.1%
 Business Inventories0.3%
WednesdayHousing Starts1.31M
 Building Permits1.39M
 IP0.3%
 Capacity Utilization78.6%
ThursdayECB Rate Decision4.25% (unchanged)
 Initial Claims235K
 Continuing Claims1855K
 Philly Fed2.9
 Leading Indicators-0.3%
Source: tradingeconomics.com

While there is not as much information due as we saw last week, I think the Retail Sales data will be instructive as another indicator of whether the economy is starting to roll over.  As well, watch for revisions from previous data releases as history shows that revisions to weaker numbers are another signal of a recession.  It will be quite interesting to see if Powell hints at a cut at the end of the month.  Certainly, the Fed funds futures market is not looking for that with <5% probability currently priced in although the September meeting is now a near-lock at 94%.  Remember, too, that after Friday’s speeches conclude this week’s group of 10 Fed comments, they will enter their quiet period and we won’t hear anything else until the FOMC meeting on July 31st.

While there is much to digest, my take is that we have rolled over in the economy.  The real question is about inflation and its ability to continue to decline.  Friday’s PPI data was the opposite of the CPI data on Thursday, showing hot prints for both headline and core, and indicative of resurging price issues.  Alas, I don’t rule out more stagflationary outcomes.  Funnily, I think that will ultimately help the dollar after an initial dip.

Good luck

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Change at the Top

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Democracy lives and it dies
By voting for folks who devise
The laws to define
What’s right, or a crime
And this year, there’s much to surmise
 
Some sixty-four nations will vote
And watch as incumbents scapegoat
Political foes
For national woes
And claim they’re the best antidote
 
However, results that we’ve seen
Show that many nations are keen
For change at the top
Or leastwise, to swap
The current regimes’ philistines

 

So, I know I am not a political analyst, but I try to be a keen observer of trends around the world.  After all, to understand the macroeconomic situation globally, one needs to at least be aware of the politics in the major nations.  As such, I am going to attempt to analyze the elections we have seen around the world to date and see if we can use this trend to look ahead and forecast how things may turn out here in the US come November.

As of today, 35 nations have held elections for either Parliament (Congress), president, or both ranging from St. Maarten to India and many in between with respect to populations.  Arguably the most important have been India, Mexico, South Africa, Taiwan, Russia, Indonesia and Iran.  That list is based on both population and geopolitical importance.  

A look at the results shows the following:

  • India – PM Modi lost significant support and will now be ruling in a coalition, rather than his previous majority.  This was a far cry from the anticipated super-majority he sought.
  • Mexico – AMLO’s hand-picked successor, Claudia Sheinbaum won handily and the Morena party won a supermajority in the lower house, but not in the Senate, so there are great expectations for significant changes unchecked by congress there.
  • South Africa – President Ramaphosa and the African National Congress (ANC) the party that has ruled this nation by itself since the end of apartheid in 1994, lost their absolute majority and is casting about for a coalition partner to allow them to remain in power.
  • Taiwan – New President Lai Ching-te, an avowed separatist relative to China won, but the people did not give him the parliamentary majority to enable significant policy changes
  • Russia – was this really an election?
  • Indonesia – New President Prabowo, a former soldier and defense minister is tipped to be far more aggressive in his handling of dissent and criticism, a concern for some, but clearly given the size of his majority (>58%) something the people are ready for.
  • Iran – This is difficult to assess as the parliamentary elections have been overshadowed by the recent accidental death of the president in a helicopter crash, with a presidential election slated for June 28th.

As well, starting tomorrow, there will be voting for the European Parliament by all twenty-seven member nations.  This is a three-day process so we should know the results by next week.

In the meantime, let me offer my take on the results in a broad-brush manner.  People around the world are unhappy with their leadership and are seeking change.  More importantly, current incumbents are really annoyed by the fact that their populations are not happy.  It has been quite a long time since there have been so many efforts by governments to control all dialog and censor anything that offers an opposing view to government rules, laws and commands.

For instance, in India, despite being very popular, Modi must now account for the fact that he has lost majority support.  He has done much good for the nation, but clearly, there is a large segment of the population that does not feel they are benefitting and were looking for change.

In South Africa, it was a little different as the economic situation there is a wreck.  Inflation is rising (5.3% and climbing), Unemployment is rampant (32.9%) and confidence readings are negative while GDP stagnates. Even though the ANC has ruled for 30 years, people want change, especially since there have been numerous allegations of corruption at the top, and the country continuously has blackouts because of failures with energy policy.

In Taiwan, while former president Tsai Ing-wen was widely admired and had high favorability ratings, there is a clear concern over too much saber rattling with the mainland.  Arguably, China spent a lot of money to interfere in that election but was unsuccessful in getting their candidate elected.  However, the population there does not want war, and that seems to be the driving force.

My point is that even popular leaders have found that their popularity is not necessarily translating into power.  It is not hard to understand why this is the case given that inflation has been a global phenomenon, and the list of military conflicts has grown and forced many nations to choose sides rather than simply do what’s seen as best for themselves.

I know I ignored Mexico here, the exception that proves the rule, although perhaps the people felt that AMLO didn’t go far enough and given the huge rise in crime from the cartels there, people were looking for a stronger government to act, hence the supermajority.

What does this mean for Europe this weekend and the US later in the year?  I have been quite clear in my views that this is a change election year.  The current left leaning coalition in the European parliament is in danger of losing its ability to enact any legislation.  We have seen these changes in the Netherlands and Sweden, and Germany’s AfD party continues to gain adherents alongside the National Front in France and Italy’s European Conservative party.  Germany has three landes (state) elections in September, all in the former East Germany, where AfD is strongest.  While every other party has indicated they will not enter a coalition with AfD, I predict that in at least one of these states, AfD will win outright, and that will really shake things up.  As to the European parliament, the voting bloc on the right may be large enough to prevent almost all new legislation.  

Meanwhile, turning back home, the US election season is heating up and here, too, I would argue the population is very unhappy.  This is evident by the dreadful polling numbers of President Joe Biden, and perhaps even more significantly, by the growth in the number of Trump converts from previously solid democratic voters (watch this 2 minute video and ask yourself if Joe Biden is in trouble or not).  The efforts to utilize the DOJ to prevent Trump from contesting the election is not going over well across the nation, and I believe it will be seen as the biggest own goal in this process.

While I believe that Mr Trump WILL BE PUT IN JAIL because the Democratic party is desperate to do anything to tarnish him, it will not matter.  In fact, it will martyr him even further.  Remember, Nelson Mandela was jailed before being elected president, Vaclav Havel of the Czech Republic was imprisoned before being elected president, Lech Walesa of Poland was imprisoned before being elected president, Lula da Silva of Brazil was imprisoned before being elected president, Mohandas Gandhi was imprisoned for sedition, and yet still became leader of India.  History shows that the people of a nation can see through the political efforts of an incumbent party in their effort to remain in power, and when they demand change, they will get it.

With this in mind, my views on the economic situation remain that inflation continues to be a major impediment for every government worldwide, but if recent data is truly an indication of slowing economic activity, the outcome could well be easier monetary policy, but still weak growth, rising inflation, a falling dollar and rising commodities.  

Politics clearly matters, but it is a longer-term issue.  For now, all the efforts by governments and central banks to apply band-aids for the current ailments seem unlikely to be effective in the timeline required to alter the current broad-based unhappiness amongst the electorate.  Change is coming, and there will be hell to pay on the other side as all these short-term fixes will simply leave the long-term problems in worse shape.

One poet’s views, and I welcome any commentary and pushback.

Thanks

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