Tag Archives: #trump

Active De-Bonding

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Up north is a nation quite vast
Whose money, of late’s been, out, cast
But word that Trudeau
Is soon set to go
Has seen Loonies quickly amassed
 

One of the biggest stories over the weekend has been the sudden upsurge in articles and discussion regarding the remaining tenure for Canadian PM Justin Trudeau.  For the past several weeks, since his FinMin Krystia Freeland resigned and published a scathing resignation letter, pressure on Trudeau has increased dramatically.  It appears that it is coming to a head with articles from both Canadian and international sources indicating he may step down as soon as this week.  As well, his main political rival, conservative party leader Pierre Poilievre, is touted, according to the betting websites, as an 89% probability to be the next PM.
 
Now, we all know the dollar has been strong in its own right lately, and I suspect that while there will be bumps along the road, it will get stronger still over the year absent some major Fed rate cutting.  As such, USDCAD is higher along with everything else.  However, you can see in the chart below (the green line rising faster than the blue line since December) that it has been an underperformer for the past month, since that Freeland resignation, as investors have been shying away from Canada, given the combination of concerns over the incoming Trump administration imposing tariffs and no political leadership to address these issues.

 

Source: tradingeconomics.com

While no sitting politician is ever willing to cede power easily, and there are indications that Trudeau is going to go down kicking and screaming, ultimately, I expect that Poilievre will be the PM and will develop a strong relationship with the US.  As that becomes clearer, I expect to see the CAD appreciate modestly vs. the dollar, but much more so against other G10 currencies.

Once more, what the Chinese have said
Is stimulus is straight ahead
But so far, its talk
They ain’t walked the walk
So, bulls need take care where they tread

Another tidbit this morning comes from Beijing, where the economic planning agency there has indicated that they will expand subsidies for consumer purchases of electronic goods like cellphones, tablets and smart watches, as President Xi continues to watch his nation’s economy grind along far more slowly than he really needs to happen.  There was an excellent thread on X this morning by Michael Pettis, one of the best China analysts around, describing the fundamental problem that Xi has and why the slow motion collapse of the property market portends weakness for a long time going forward.  As is almost always the case, while tearing the proverbial band aid off quickly can hurt more at the instant, the pain dissipates more quickly.  President Xi believes he cannot afford to inflict that much pain, so their problems, which stem from decades of malinvestment in property that inflated a massive bubble, are going to last for a long time.  While CNY (+0.4%) is modestly firmer this morning, that is only because the dollar is weaker across the board, and in fact, it is significantly underperforming.

This week, the US Treasury’s Yellen
Much debt, will look forward to sellin’
The market’s responding
By active “de-bonding”
With dollars and bonds both rebellin’

The last big story of the day is clearly the upcoming Treasury auctions this week, where the US is set to sell $119 billion of debt, starting with $58 billions of 3-year notes today.  Arguably, market participants have been aware that this was going to be a necessary outcome given the massive deficits that continue to be run by the US.  Adding to the broad concept of deficits, the Biden administration appears to be trying to spend every appropriated dollar in the last two weeks in office and that requires actual cash, hence the auctions to raise that cash.  In addition, the debt ceiling comes back into force shortly, so they want to get this done before that serves to prevent further issuance.

Now, the yield curve has reverted back to a normal slope with the 2yr-10-yr spread at 34bps and 30yr bonds trading another 22bps higher than 10yr at 4.81% and bringing 5% into view.  Here’s the thing about the relationship between the dollar and yields; the dollar is typically far more correlated to short-term yield differentials, not long-term yields.  So rising 30yr bond yields is not likely to be a dollar benefit.  In fact, just the opposite as international investors will not want to suffer the pain of those bonds declining in price rapidly.  

And this is what we are witnessing this morning as the dollar, which rallied sharply at the end of last week, is correcting in a hurry today.  As mentioned above, CNY is the laggard with the euro, pound, Aussie, Kiwi and Loonie all firmer by 1% or more this morning and similar gains seen across the emerging markets, with some extending those gains as far as 1.35% or so.  Is this the end of the dollar?  I would argue absolutely not.  However, that doesn’t mean that we won’t see a further decline in the buck before it heads higher again.  A quick look at the chart below, which shows the Dollar Index, while it has just touched the steep trend line higher, it remains far above its 50-day and 100-day moving averages.  Howe er, it seems that the big story here comes from a report from the Washington Post that Trump is considering much less widespread tariff impositions with only some critical imports to be addressed.  As such, given the tariffs = higher dollar consensus, if this is true, you can understand the dollar’s retreat.

Source: tradingeconomics.com

However, today’s story is that of a weak dollar and strong equity markets, well at least in some places. Friday’s US equity rally was not followed by similar enthusiasm in Asia with the Nikkei (-1.5%) leading the way lower while both the Hang Seng (-0.4%) and China (-0.2%) also lagged.  Perhaps the mooted China stimulus helped those markets on a relative basis.  Europe, however, is in fine fettle (CAC +2.3%, DAX +1.4%, IBEX +0.9%) as PMI data released this morning was solid, if not spectacular, and the weaker dollar seems to be having a net positive impact.  US futures are also firmer, with NASDAQ (+1.1%) leading the way.

In the bond market, the big movement was in Asia overnight as JGBs (+4bps) sold off alongside virtually every other Asian bond market except China, which saw yields edge lower by 1bp to a new record low of 1.59%.  In Europe, there has been very little movement with yields +/- 1bp at most and Treasury yields, which had been firmer earlier in the overnight session, have actually slipped back at this hour and are lower by 2bps to 4.58%.

In the commodity markets, the weak dollar has helped support prices here with oil (+1.0%) continuing its rally (+9% in the past month) as the combination of Chinese stimulus hopes and cold weather seem to be providing support.  Speaking of cold weather, NatGas (+7.4%) is also in demand this morning as winter storm Barrie makes its way across the country.  In the metals markets, gold (+0.3%) is the laggard this morning with both silver (+2.3%) and copper (+2.4%) really taking advantage of the dollar’s weakness.

On the data front, there is a ton of stuff this week, culminating in NFP on Friday.

TodayPMI Services58.5
 PMI composite56.6
 Factory Orders-0.3%
TuesdayTrade Balance-$78.0B
 ISM Services53.0
 JOLTS Job Openings7.70M
WednesdayADP Employment139K
 Initial Claims217K
 Continuing Claims1848K
 Consumer Credit$12.0B
 FOMC Minutes 
FridayNonfarm Payrolls160K
 Private Payrolls134K
 Manufacturing Payrolls10K
 Unemployment Rate4.2%
 Average Hourly Earnings0.3% (4.0% Y/Y0
 Average Weekly Hours34.3
 Participation Rate62.8%
 Michigan Sentiment73.9

Source: tradingeconomics.com

In addition to all this, we hear from six more Fed speakers over seven venues with Governor Waller likely the most impactful.  Over the weekend, we heard from Governor Kugler and SF President Daly, both explaining that they needed to see more progress on inflation before becoming comfortable that things were ok.

Clearly, the tariff story is the current market driver in the dollar.  As I never saw tariffs as the medium-term driver of dollar strength, I don’t think it has as much importance.  Plus, this is a report from the Washington Post.  There are still two weeks before inauguration and many things can happen between now and then.  Nothing has changed my longer-term view that the dollar will be supported as the Fed, which is not tipped to cut rates this month and is seen only to be cutting about 40bps all year will ultimately raise rates as inflation proves far more stubborn than desired.  But that is the future.  Today, pick spots to establish dollar buys and leave orders.

Good luck

Adf

The Conundrum We Find

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Tis nearly a month since the vote
When President Trump, Harris, smote
So maybe it’s time
To sample the clime
Of what all his plans now connote
 
To many, his claims are just talk
With pundits believing he’ll balk
But history shows
That Trump will bulldoze
Detractors as he walks the walk
 
So, tariffs are likely to be
The first part of his strategy
But if that’s the case
The dollar may chase
Much higher than he’d like to see
 
It seems the conundrum we find
Is not all his thoughts are aligned
And this, my good friends
Is why dividends
Are paid to a hedge, well designed

 

I have tried to stay away from forecasting how things will evolve once Mr Trump is inaugurated, but this weekend, listening to a podcast (Palisades Gold Radio) I got inspired as there was some interesting discussion regarding the dollar.  As I consider the issues, as well as what appears to be the current expectations, I thought it might be worthwhile to note my views, especially in the context of companies considering their hedging needs for 2025 and 2026.

Clearly, the watchword for Trump is tariffs as he has been boasting about implementing significant tariffs on trade counterparties on day 1.  The latest discussion is 25% on Canada and Mexico and 60% on China with Europe in the crosshairs as well.  (Remember, though, many believe these tariff threats are being used to encourage those countries to change their emigration policies and help stop the current influx of illegal immigration.  So, if countries do their part, those tariffs may never materialize.)

The classical economic view is that tariffs are a terrible policy as impeding free trade negatively impacts all players.  As well, you will hear a lot about how the countries in question will not pay them, but rather consumers in the US will pay those tariffs.  As such, there is a great deal of talk about how tariffs will feed immediately into inflation.  (Of course, this is in addition to the inflation that will allegedly come immediately on the heels of Trump’s promise to deport all illegal aliens in the country because it will decimate the workforce.  On this subject, simply remember that the deportation will result in a significant decline in demand for things like housing which remain quite sticky in the pricing process.)

But let’s consider what Trump’ stated goals really are.  I would boil them down to rebuilding America’s industrial capacity and creating good jobs throughout the nation for citizens and legal residents.  If he is successful, the result will be a dramatic reduction in the trade deficit which will reduce the need to import so much foreign capital to fund things.  And what are the knock-on effects there?  Well, classical economics tells us that tariffs will be met with foreign currency depreciation (higher dollar) in an effort to offset the higher prices of those imports.  However, one of Trump’s goals is to reduce the value of the dollar in order to make US exporters more competitive internationally while reducing demand for imports.  Now, it seems that those two goals are at odds.

I think the thing we need to consider, though, is that the timing of these changes is very uncertain.  My guess is Trump is thinking of a 4-year process, or at least a 3-year one, not a 6-month outcome.  After all, these are tectonic shifts which will take time to play out.  Based on his commentary, and I think we must pay it close attention as he is pretty clearly telling us what he wants to do, the market response to any tariffs imposed will likely be weakness in the currencies of the countries affected.  

But, over time, it would not be surprising to see Trump lean effectively on the Fed to reduce policy rates (remember, he was quite upset the Fed never went negative).  As well, if there is any success in the DOGE project, with significant reductions in spending and deficits, that seems likely to alleviate some of the concerns over the US fiscal stance.  After all, if debt grows more slowly than the nominal pace of the economy, it remains quite manageable and should help remove some of the current hysteria.  In fact, a look at the 10-year yield over the past month (see chart below) shows that it has fallen 25bps (although they are 4bps higher this morning) and may well be signaling a market that is willing to give DOGE a chance.  If that is the case, it seems quite possible that the dollar will eventually start to recede from its current loftier levels.

Source: tradingeconomics.com

Bringing this back to the hedging issue, I might suggest that given the uncertainty of the timing of any movements, receivables hedgers will be well-served by using optionality here, whether outright purchases or zero-premium structures as they look to address 2025 and 2026 exposures.  While the dollar may well continue its recent strengthening trend with the euro heading to parity or below for a time, and other currencies following, at some point in H2 25 or beyond, it is quite feasible that the dollar reverses course.  Consider what could happen if Trump convenes a Mar-a -Lago accord, similar to the Plaza Accord of 1985, which saw the dollar decline dramatically in the ensuing three years, falling nearly 50% against a broad mix of trading partners’ currencies by the end of 1987.

Source: tradingeconomics.com

In that situation, those out-month hedges will want to have optionality to allow the weaker dollar to benefit the revenue line.  Similarly, for those with payables hedges, care must be taken to hedge effectively there as well given the opportunity for much higher costs due to the potential dollar decline.  Current market pricing (implied volatilities) is quite reasonable from a long-term perspective.  While they are not near the lows seen in the past year, they very likely offer real value for hedgers of either persuasion.

I apologize for the extended opening, but it just seemed to be a good time to review the evolving Trump impact.  Now onto markets. The first thing to recall is that last Wednesday’s PCE data continued to show that inflation, even in this measurement, appears to have stopped declining and is beginning to head higher again.  This will continue to put pressure on the Fed as housing data was pretty dreadful last Wednesday.  Add to the data conundrum the unknown unknowns of a Trump presidency and Chairman Powell will have his hands full until his term ends.

Friday’s abbreviated session in the US saw two of the three major indices trade to new all-time highs (NASDAQ is < 1.0% below its recent high) and that seemed to help support the Asian time zone markets with green outcomes nearly universal.  Japan (+0.8%), China (+0.8%) and Hong Kong (+0.65%) all had solid sessions as did every regional exchange other than Indonesia (-0.95%) which has been suffering for the past several months in contrast to most other nations.  In Europe, the picture is more mixed with most bourses in the green (DAX +0.8%, IBEX +0.9%) although the CAC (-0.35%) is feeling pain from increased worries that the government there will fall, and the fiscal situation will be a disaster going forward.  French yields continue to climb vs. every other European nation as the country is leaderless for now.  For the rest of the continent, slightly softer PMI Manufacturing data seems to have investors increasing their bets that the ECB is going to become even more aggressive in their rate cutting going forward.  As to the US futures market, at this hour (7:00) it is mixed with the SPX (+0.5%) rising but the other indices little changed.

In the bond market, as mentioned above, US yields have rallied a bit although European yields are all lower by between -2bps and -4bps (France excepted at unchanged) as those hopes for an ECB rate cut are manifest here as well.  As to JGB’s, 10yr yields are higher by 2bps this morning as there is increasing chatter that Ueda-san will be hiking rates later this month.  One other interesting note here is that in the 30-year space, Chinese yields have fallen below Japanese yields for the first time ever.  This seems to be an indication that market expectations of a Chinese rebound (despite solid Caixin PMI data overnight at 51.5) are limited at best.

In the commodity markets, oil is little changed on the day, remaining below the $70/bbl level but potentially seeing some support after a story surfaced that China would be reducing its purchases of Iranian oil in an effort to avoid US sanctions and tariffs under the Trump administration.  If Trump is successful in isolating Iran again, that could well support prices.  In the metals markets, this morning is seeing a little profit-taking in the precious space after last week’s late rally, but industrial metals are little changed.

Finally, the dollar is stronger again this morning, rallying against all of its counterparts in various degrees.  The euro (-0.5%) is lagging along with SEK (-0.65%) in the G10 space as concerns over slowing growth weigh on the single currency.  But the dollar is stronger across the board.  In the EMG bloc, BRL (-0.75% and back above 6.00) is leading the way lower but we have seen declines across the board with MXN (-0.4%), KRW (-0.7%), ZAR (-0.6%) and HUF (-1.1%) just some of the examples.  Despite that hotter than expected PCE data last Wednesday, the market is still pricing a nearly 62% probability of a cut by the Fed later this month.

On the data front, there is much to learn this week, culminating in NFP data on Friday.

TodayISM Manufacturing47.5
 ISM Prices Paid55.2
TuesdayJOLTS Job Openings7.48M
WednesdayADP Employment150K
 ISM Services55.6
 Factory Orders0.3%
 Fed’s Beige Book 
ThursdayInitial Claims215K
 Continuing Claims1905K
 Trade Balance-$75.1B
FridayNonfarm Payrolls195K
 Private Payrolls200K
 Manufacturing Payrolls15K
 Unemployment Rate4.2%
 Average Hourly Earnings0.3% (3.9% Y/Y)
 Average Weekly Hours34.3
 Participation Rate62.6%
 Michigan Sentiment73.3

Source: tradingeconomics.com

In addition to all the data, we hear from 10 different Fed speakers, most notably Chairman Powell on Wednesday afternoon.  Given that the recent data does not seem to be going according to their plans, at least not the inflation data, it will be very interesting to hear what Powell has to say about things.

As the end of the year approaches with many changes certain to come alongside the Trump inauguration, I will once again express my view that hedging is crucial for risk managers here.  While I see the dollar benefitting in the near term, as discussed above, the longer-term situation is far less certain.

Good luck

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Think More Than Twice

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The verdict, as best I can tell
Is Trump and his new personnel
Are being embraced
So, buy risk, post-haste
Lest owners all choose not to sell!
 
And yet there seems always a price
Where owners will sell in a trice
But if it’s that high
It just might imply
It’s worth it to think more than twice

 

Euphoria is one way to describe what we have seen in markets over the past several sessions, with substantial gains across both equity and bond markets while havens like gold and the dollar have been discarded. Insanity may be a better way to do so.  Regardless of your description, the facts are that risk assets have been consistently higher since the election results and there is a palpable excitement about how the future, at least for markets, will unfold.  I hope all this excitement is not misplaced, but it is still early days.  Just remember, that whatever ideas are currently being bandied about regarding Trumpian policies, it is almost certain that the reality will not quite live up to the hype.

Consider, too, for a moment just how different the impact will be on different markets.  The obvious first thought is China, where we have seen a significant divergence between the S&P 500 and the CSI 300 over the past week as seen in the chart below.  

Source: tradingeconomics.com

My point is all that euphoria is very country specific.  After all, yesterday’s comments by President-elect Trump that on day one he will impose tariffs of 25% on all imports from both Mexico and Canada had the expected impact on their currencies, weakening both substantially.  In fact, it is quite interesting to look at a longer-term chart of USDCAD and see that this is the third time in the past decade the exchange rate has traded above 1.40.  The previous two times were the beginnings of Covid, amid massive risk-off trading…and in 2016 when Mr Trump was previously elected president.

Source: tradingeconomics.com

I assure you that whatever China decides to do, and they have many inherent strengths as well as weaknesses, both Mexico and Canada are going to ultimately concede to whatever Trump wants as they cannot afford to ignore it.  In fact, my take is that the reason so many political leaders around the world are distraught is because they recognize that they are going to have to change their policies to keep in Trump’s good graces.  To me, the implication is that we are due for much more volatility as markets respond to all the changes that are coming.

And that should be our watchword going forward, volatility.  We live in a time where previous theories that led to previous policies are being questioned and upended.  We are also living through what appears to be the end of the Pax Americana era, where the US is turning its focus inward rather than concerning itself with pushing its brand globally.  These realignments are going to be ongoing for quite a while, and as new models will need to be developed and implemented, in both the public and private sectors, outcomes are going to remain quite uncertain for a while.  It is this that will drive all the volatility.  Once again, I urge hedgers to keep this in mind and maintain robust hedging programs as risk mitigation is going to be critical for future performance.

Ok, so let’s look at how things turned out overnight.  While the rally in the US equity market continues, especially in value and small-cap stocks, the story in Asia was far less positive with declines in Japan (-0.9%), China (-0.2%) and Australia (-0.7%) and almost every regional exchange in the red overnight.  This seems a direct response to the resurgence of tariff talk from Trump and I expect may be the guiding force for a while yet, perhaps even until the Inauguration.  Of course, we could also see some nations capitulating quickly in an effort to gain favor and I would expect those markets to reflect a more positive stance in that situation.  Neither is Europe immune from tariff talk as every bourse on the continent is weaker this morning amid concerns that tariffs are coming for them as well.  In addition, Trump has made it clear he is uninterested in supporting the Ukraine effort which means that either Europe will need to spend more money, or the map is going to change in an uncomfortable manner.  As to US futures, at this hour (7:20) they are modestly firmer.

In the bond market, yesterday saw the largest rally (-14bps) since the July NFP report showed Unemployment jumped to 4.3% in early August and triggered all sorts of claims that recession had started.  Yesterday’s catalyst was far more ambitious, ascribing success to Treasury Secretary selection Scott Bessent’s ability to rein in the fiscal deficit.  That bond rally dragged European sovereign yields lower, although a much smaller amount, 3bps-5bps, and this morning things are back to more normal trading with Treasury yields unchanged while Europeans are generally trading with yields lower by -2bps.  Certainly, if fiscal issues are successfully addressed, the opportunity for bond yields to decline exists, but this seems like a lot of hope right now.

In the commodity markets, gold had its worst day in forever, falling $110/oz although it is rebounding a bit this morning, up $21/oz or 0.8%.  That move seemed entirely driven by this same euphoria that has been underpinning both stocks and bonds, namely the future is bright, and havens are no longer needed.  Silver, too, had a rough day yesterday and is rebounding this morning, +1.4%, while copper sits the whole move out.  Oil (+0.8%) sold off yesterday amid the same risk thoughts as well as the news that an Israeli/Hezbollah ceasefire may be coming soon, reducing Middle East risk.  In the short-term, the day-to-day vicissitudes of oil’s price are inscrutable to all but the most connected traders, but nothing has changed my longer term view, which has only been enhanced by Trump’s drill, baby, drill thesis, that there is plenty of oil around and sharp price rises are unlikely going forward.

Finally, the dollar seems to have put in a top last Friday and has been selling off since the Bessent announcement.  I’m not sure I understand the logic here as Bessent is seeking to increase real GDP growth while reducing the deficit, both of which strike me as dollar positives.  Perhaps the idea is interest rates will be able to be lower in that situation, thus undermining the dollar, but again, on a relative basis, it seems quite clear that the US remains in far better macroeconomic condition than virtually every other nation.  So, if the US is cutting rates, others will be cutting even faster.  However, that is where we are this morning, with both the euro (+0.5%) and pound (+0.4%) climbing alongside the yen (+0.7%).  Offsetting that is the Loonie (-0.7%) and MXN (-0.8%) as both are the initial targets of those potential tariffs.  It strikes me that we are likely to see a number of previous relationships break down as the tariff talk adjusts views on different national outcomes.  Once again, volatility seems the watchword.

On the data front, this morning brings Case-Shiller Home Prices (exp 4.8%), Consumer Confidence (111.3) and New Home Sales (730K) and then the FOMC Minutes are released at 2:00.  All eyes will be there as things have so obviously changed since the meeting earlier this month, including Chairman Powell’s downshifting on the rate cutting cycle.  You remember, he is no longer in a hurry to do so.  Interestingly, as of this morning, the futures market is pricing in a 60% chance of a cut next month, up from 52% yesterday morning.  Perhaps that is a result of yesterday’s Chicago Fed National Activity Index, a meta index looking at numerous other indicators, which printed at -0.40, much worse than the expected -0.20, and as can be seen below, has shown a consistent trend that growth may not be what some of the headline data implies.

Source: tradingeconomics.com

Remember, too, with the holiday on Thursday, tomorrow brings a huge data dump so macro models will be waiting to respond.  As well, given the holiday, liquidity is likely to be less robust than normal meaning price dislocations are quite possible.

My sense is the dollar’s decline is more of a profit taking exercise (recall it rallied more than 7% in a few months) than a change in the long-term fundamentals.  But it is always possible that the new administration’s policies will be focused on pushing the dollar down, although funnily enough I don’t think Trump really cares about that this time.  My take is he is far less concerned about growing exports than reducing imports and bringing production home.  We shall see.

Good luck

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Kind of a Ruse

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The central bank mantra worldwide
Is ‘flation is set to subside
So, rate cuts remain
The path they’ll maintain
With alternate views all denied
 
But weirdly, despite these strong views
The data just seems to refuse
To show ‘flation slowing
In fact, it keeps showing
Their comments were kind of a ruse

 

Ask any central banker around the world their view on the path of inflation and I assure you they will claim it is slowing and will return to their 2% goal over time.  They will point to obscure signals some months, and headline inflation prints other months, but nothing will dissuade them from this view.  

Now, I am just an FX guy and so clearly don’t have the same expertise in econometric modeling that all those PhD’s in all those central banks have but…it does sort of seem like all their models simply have 2% as one side of the equation and they use goal-seek in Excel to create their outcomes. And anyway, how did 2% become the “natural” rate of inflation?  After all, that inflation rate was literally pulled out of thin air by RBNZ Governor Donald Brash back in 1990 and has been copied by virtually every other central bank around the world since.  

But, whatever the history, that is the goal and recent data from countries throughout the G10 show that prices are not really converging to this rate.  The UK is the latest to release data with the Headline CPI rising 2.3%, a tick more than expected and Core rose 3.3%, 2 ticks more than expected.  It seems that the same problems the Fed is having with services ex-shelter are being felt in many places around the world.  This is the portion of the CPI basket that is most directly impacted by wages and wages continue to rise (which is a good thing for most people), just not necessarily quickly enough to keep up with inflation.  For example, Eurozone Negotiated Wage Growth rose 5.42% in Q3, its fastest rise since the Eurozone was formally created as per the chart below.  It strikes me that the ECB is going to find it very difficult to push prices lower absent causing a deep enough recession where layoffs are widespread, and wages fall.  And my guess is that is not one of their goals.

Source: tradingeconomics.com

Of course, we all know the situation here in the States, where the CPI data has formed a base above 3% and seems far more likely to rise than fall, also absent a major recession. 

Ultimately, it begs the question why we care about this data (other than the obvious reason we all have to live with rising prices) from a market perspective.  To the extent that monetary policy is a key driver of markets around the world, and relative monetary policy is an important input into the value of different currencies, the relative inflation rates are a critical piece of the puzzle to try to figure out what is happening and how one can hedge their exposures.  So, if inflation rates everywhere are slow to return to that sacred 2% level, then different central banks are going to behave differently in order to achieve their goals.

For instance, earlier this week we saw the Minutes of the RBA’s meeting where they were distinctly hawkish regarding the fact that inflation does not seem to be falling the way they hoped prayed for expected based on their models.  As such, markets adjusted their pricing for interest rates to remain higher for longer and that helped support the AUD on a relative basis.  This morning, amidst a broad-based dollar rally, the pound (-0.25%) is the second-best performer in the G10, after the dollar, as the higher than forecast CPI data has traders expecting the BOE to slow the pace of rate cuts to address the issue.  And this is why we care.

Remember, too, while there is currently an extraordinary amount of digital ink being spilled as pundits around the world try to anticipate what President-elect Trump is going to do regarding fiscal policy and tariffs and how that is going to impact relative trade flows as well as monetary policy responses to these actions, my take is that is an enormous waste of time.  The first thing we know is that nobody, not even Trump himself, really knows how this is going to play out as there are so many potential paths down which he can tread.  And second, the situation seems akin to Keynes’ famous analogy to a beauty contest where you need to select the person who the crowd thinks is the most beautiful, not the one you may think fits that description.  In other words, trying to predict the outcome implies understanding what everyone else is expecting, and right now, expectations are widely disparate. 

It is for this reason that hedging is so critical, and having a consistent hedging plan is key.  None of us has a crystal ball, and managing risk is far more about mitigating big drawdowns than capturing big gains.

Ok, a little long-winded this morning so let’s zip through the overnight market activities.  Mixed is the best description for yesterday’s US session, with the DJIA sliding while the other two major indices rallied a touch. It also describes the Asian session overnight as the Nikkei (-0.2%) slipped along with Australia (-0.6%) while China and Hong Kong both managed modest 0.2% gains.  The PBOC left Loan Rates unchanged last night, as widely forecast and I expect they will not do anything until Trump is in office and has his team in place.  As to European bourses, they are all in the green this morning, but just barely so, with gains between 0.1% and 0.3%, hardly exciting.  As to US futures, they are edging higher this morning by 0.1% or so as the most important news in the world, Nvidia earnings, are due to be released after the close today.

In the bond market, yesterday’s yield declines are being almost perfectly reversed this morning with Treasury yields higher by 3bps and European sovereign yields rising between 4bps and 6bps.  Certainly, the higher inflation print in the UK has not helped sentiment and I suppose there is some reaction to some of Trump’s recently announced Cabinet picks, notably the Commerce Secretary choice, Howard Lutnick, who is by all accounts a major proponent of tariffs.

In the commodity markets, oil (+0.5%) is holding its recent gains although WTI remains below $70/bbl.  My take is that a Trump presidency is going to be quite negative for the price of oil as reduced regulations on drilling along with access to more sites will see production increase.  As to the metals markets, gold (-0.2%) has slowed its recent rebound, as has silver (-1.2%) although copper (+0.6%) is holding its own this morning.  The last week has seen the metals markets recoup a substantial portion of the recent drawdown although all of them remain lower than levels seen a month ago.

Finally, the dollar is back in fine form this morning, rising against all its counterpart currencies.  The laggards in the G10 are NOK (-0.8%) and SEK (-0.8%) although the euro (-0.5%) is under severe pressure again as it continues to probe toward the key 1.0500 technical level.  In the EMG bloc, HUF (-1.0%) is the laggard although most of the bloc is softer by between -0.3% and -0.5%.  We continue to see CNY (-0.25%) slide as the dollar pushes back above 7.25 this morning.  That is the level that has held things in check for the past 5 years, and many believe that when Trump takes office, we could see the renminbi weaken much further once tariffs are imposed.  Of course, one of the things the PBOC has been fighting for a long time is a chaotic slide in the renminbi as that does not suit President Xi’s goals of stability to encourage more use by other parties.

The only US data today is the EIA oil inventories with a modest build expected after last week’s large draws.  Yesterday’s housing data was a touch weaker than expected and we have heard very little from Fed speakers since Powell explained he was sauntering toward the next rate cut rather than hurrying there.  As of this morning, the market probability of that cut happening in December sits at 57%, which is the lowest it has been since the previous meeting.

There are many cross currents in the market narrative at this time with nothing remotely clear.  The one thing we know about Donald Trump is he has the capacity to surprise absolutely everyone with his actions, regardless of his words.  Again, this is what informs us that a consistent hedging program is the only way to mitigate against major surprises.

Good luck

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Whining and Bleating

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In Rio, the G20’s meeting
With typical whining and bleating
No progress was made
On tariffs or trade
And Trump, though not there, took a beating
 
Seems leaders in most of these nations
Are fearful of future relations
With Trump and the States
Which just demonstrates
How low are their own expectations

 

I guess the idea of these broad talking shops is rooted in a desire to keep open lines of communication between parties with different views on the way things should be in the world.  But, boy, the G20 has really deteriorated over time.  Probably, this is merely a symptom of the underlying changes in international relations.  Remember, the G20 is an outgrowth of the Group of 7 nations (US, Germany, UK, Japan, France, Canada and Italy) and only began in 1999.  The idea was to help develop the globalization initiative by creating an organization that included both developed and developing nations.  It was this group that led to China joining the WTO in 2001 and, ironically, which laid the groundwork for its own slow disintegration.

This is not to say that these leaders are going to stop meeting each year, just that the opportunity for substantive policy proposals has likely passed us by.  And understand, this has been the case for a while now as the Chinese mercantilist policy has seemingly reached the end of its global acceptance.  While President-elect Trump tends to get the most bashing for this, one need look no further than Europe to see tariff and non-tariff barriers rising quickly.  Below, I will allow Bloomberg’s reporters to summarize some of the key issues highlighting the lack of agreement on anything.

  • Germany’s Olaf Scholz and France’s Emmanuel Macron are pushing for tougher language in the summit communique against Hamas and Russia on the wars. Brazil doesn’t want to reopen the text, fearing that it will reignite battles over other issues too. 
  • UK Prime Minister Keir Starmer irritated Chinese officials by raising human rights and the issue of Taiwan with President Xi Jinping at their first bilateral meeting.
  • The potential impact of Donald Trump’s impending return to the White House on trade and diplomatic relations hung over many of the day’s bilaterals. 
  • The rivalry between host Brazil’s Luiz Inacio Lula da Silva and Argentina’s Javier Milei was on full display on everything from the role of the state in fighting poverty to climate change, with the latter leader maintaining his contrarian stance to some of the key points in the summit’s statement.
  • There was even drama around the traditional family photo, which US President Joe Biden, Canada’s Justin Trudeau and Italian Prime Minister Giorgia Meloni somehow missed.

As I said, I expect that these meetings will continue but their usefulness is very likely to continue to deteriorate.  One way you know that this process has reached the end of the road is that no financial markets have reacted to any commentary from anyone at the meeting.  In the past, the G20 statement or comments from leaders on the sidelines would move markets as they implied policy shifts.  No longer.  Remember, too, that at least four of these leaders are lame ducks (Biden, Macron, Scholz and Trudeau) and will be out of office within a year.

Away from the photos and sun
Investors see fear and not fun
Ukraine’s getting hotter
Midst greater manslaughter
While pundits, new stories, have spun

However, if we step away from the glitz (?) of the G20 meeting, markets are demonstrating a fearful tone this morning.  Yesterday saw US equities with a mixed session as investors continue to try to determine the impacts of President Trump’s return.  Will there be tariffs?  If so, how big and on what products?  And which companies will benefit or be hurt by the process.  Generally speaking, the thought has been small-cap companies would be the big beneficiaries while both Big Pharma and Big Food would feel pressure from this new administration.  But how has that impacted other nations and other markets?

In truth, I have a feeling one of the key issues this morning is that President Biden’s change in policy to allow Ukraine to fire long-range missiles into Russia is now a growing concern.  Russia has altered their nuclear response policy, essentially threatening that if this keeps up, they will both blame the US and NATO and respond with nuclear weapons if they determine that is appropriate.  Funnily enough, investors, especially those in Europe, have determined that may not be a positive outcome for European companies.  Hence, bourses across the continent are all lower this morning with declines greater than -1.1% everywhere with Poland (-2.1%) the laggard.  As to Asian markets overnight, they were broadly firmer as the potential escalation in Europe is likely to have a smaller impact there.  But US futures are under pressure this morning, -0.4% across the board at this hour (6:30).

That risk off feeling is being felt in bond markets as well, with yields falling everywhere as investors switch from stocks to bonds.  Treasury yields have fallen -6bps and we are seeing similar declines, between -4bps and -6bps, across the continent as well.  Fear is palpable this morning here.

This fear is clear in the commodity markets as well where oil (-1.0% after a 3.3% rally yesterday) is softer along with copper (-0.7%) but precious metals (Au +0.8%, Ag +0.5%) are both in demand.  The one other noteworthy move this morning is NatGas (+0.6%), bucking the oil trend as despite the oft-feared global boiling (to use UN Secretary General Antonio Guterres term), Europe is feeling an unseasonable cold spell with rain and temperatures just 40° Fahrenheit, some 15° below normal.

Finally, the dollar is back on top this morning as fear has driven investors and savers to holding the greenback despite all its problems.  Using the Dollar Index (DXY) as our proxy, you can see from the below chart that despite all the huffing and puffing that the post-election climb of the dollar had ended last Thursday, in fact, we have only seen a very modest correction of the sharp election move and my take is we have higher to go from here.

Source: tradingeconomics.com

Adding to the risk-off thesis is the fact the JPY (+0.4%) is firmer and CHF (0.0%) has not declined with both of those traditional havens holding up well.  One other note is AUD (-0.2%) is one of the better performers after the RBA Minutes last night indicated that the central bank Down Under is also in no hurry to cut rates with fears of inflation still percolating there.  A quick look across the EMG bloc shows us that virtually all these currencies are softer with PLN (-0.8%) and ZAR (-0.65%) the laggards.  I guess given the concerns over Poland and a potential escalation of the war in Ukraine, it is no surprise the zloty is under pressure.

On the data front, this morning brings Housing Starts (exp 1.33M) and Building Permits (1.43M) as well as Canadian inflation (1.9% headline, 2.4% Median).  There are no Fed speakers scheduled today and quite frankly; it doesn’t strike me that Housing data is critical to decision making right now.  Fear is in the air and that is likely to continue to drive markets.  With that in mind, a deeper equity correction along with continued USD strength seem like the best bets for the day.

Good luck

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A Policy Tweak

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Some mornings there’s nothing of note
Upon which this poet can dote
The news cycle’s turned
To what folks have learned
While still up in arms o’er the vote
 
So, data last night and this week
Is not very likely to wreak
Much havoc on prices
Unless there’s a crisis
That starts from a policy tweak

 

On the macroeconomic front, there has been very little new news to discuss since I last wrote.  Friday’s Retail Sales data was a bit stronger at the headline level, and there was also a revision higher to the previous month, although the ex-autos number was soft.  Perhaps more impressive though, was the Empire State Manufacturing Index which jumped from -11.90 to +31.20, the highest reading since December 2021 and the biggest one-month jump on record.  It appears there is some excitement about the election results.  But all that was Friday, and markets have priced it in.  Since then, crickets.

Which takes us to the story that seems to be getting more press than anything else, although it seems only tangentially related to how markets may behave, at least so far.  This is the news that President Biden has given permission for Ukraine to use long-range missiles supplied by the US and Europe to attack Russia directly.  Now, I am not a geopolitical analyst, but this seems unusual on two counts.  First, given President Biden is the dictionary definition of a lame duck, it is hard to understand the perceived benefit of this move, especially given that President-elect Trump has been quite clear in his goal to end the war, or at the very least the US activities there. And second, what possible good can come from raising the specter of increased hostilities with a nuclear power?  

Beyond the very obvious reasons that we all should care about this as nobody wants a nuclear conflagration, it has been interesting to observe the market response to this news.  We ought not be surprised that safe havens have rallied which helps explain the rebound in gold (+1.1%) and silver (+1.6%) this morning.  As well, oil (+0.5%) and NatGas (+1.8%) seem to be benefitting as a serious increase in fighting there could well have a negative impact on production.  While many had been focused on the Middle East being the likely hot spot for an oil production halt, perhaps this will surprise folks.

Perhaps it is also no surprise that the dollar is holding its own this morning, slightly higher vs. most G10 currencies with the yen (-0.5%) the laggard.  In one way, that is unusual as the yen is typically seen as a haven in its own right, but last night, BOJ Governor Ueda spoke and said the following, “The actual timing of the adjustments [rate hikes] will continue to depend on developments in economic activity and prices as well as financial conditions going forward.  Gradually adjusting the degree of accommodation in line with improvement in economic activity and prices will support long-term economic growth and contribute to achieving the price stability target in a sustainable and stable manner.”  In other words, while rate hikes may be necessary, it is still too soon to determine if that is the appropriate policy going forward and what the timing may be.  Meanwhile, in the EMG bloc, only ZAR (+0.5%) is bucking the trend of dollar strength and that seems to be based on the rebound in precious metals prices.

Finishing up with other markets, bond yields are climbing higher across the board, with Treasury yields higher by 3bps and European sovereign yields rising between 4bps and 7bps as concerns grow that central bank policy is out of step with the potential inflation outcomes.  Consider that, other than the BOJ, the rest of the G10 are cutting interest rates and inflation’s decline appears to be abating everywhere.  In that situation, it should be no surprise that investors are demanding higher yields to own sovereign debt.  But honestly, it is very hard to link today’s price action here to the change in Ukraine policy.

Finally, equity markets are confused mixed.  Friday’s US selloff was followed in Japan (-1.1%) despite the yen’s weakness which generally helps equities there.  Hong Kong (+0.75%) managed a gain although mainland shares (-0.5%) continue to leak oil.  There is a story that the government in China will allow some regions to bring forward that debt swap to get things started sooner, but the more widely read story is that the Chinese population is set to shrink by >50 million by the end of the decade, an unenviable situation in which President Xi finds himself.  After all, inward migration to China is non-existent.  European bourses are mostly softer, but only modestly so (DAC -0.2%, CAC -0.2%, IBEX -0.1%) as investors await the ongoing news from the US and the presidential transition.  ECB speakers have begun to harp on the issue of primary budget deficits across the Eurozone and how that will impair growth opportunities going forward, although will not dampen inflation.  As to US futures, at this hour (7:30) they are basically unchanged.

The fact there was limited data overnight was a harbinger of the upcoming week, where there is also limited data.

TuesdayHousing Starts1.34M
 Building Permits1.43M
ThursdayInitial Claims223K
 Continuing Claims1875K
 Philly Fed8.0
 Existing Home Sales3.93M
FridayFlash Manufacturing PMI48.8
 Flash Services PMI55.3
 Michigan Sentiment73.5

Source: tradingeconomics.com

Interestingly, it appears that the Fed has started their Thanksgiving break early as there are only three speeches slated, and Chicago Fed president Austan Goolsbee is making two of them.  However, Powell’s comments on Thursday about no hurry remain the market’s guiding light for the time being.  Futures markets are continuing to price about a 62% probability of a cut next month and are only pricing a total of 75bps of cuts by the end of 2025.  Once again, if you want to understand the dollar’s resilience, look no further than this situation.

For now, I expect that every announcement by Trump regarding cabinet positions, especially the Treasury role, is going to be of far more significance than any of the economic data set to be released.  Perhaps the only other noteworthy thing this week is Nvidia is due to report earnings Wednesday after the close, and of course, that will get pulses quickening.

Nothing has changed my long-term view that the dollar remains best placed to perform well.  Here’s hoping that there is no nuclear war!

Good luck

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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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