Tag Archives: #trump

Political War

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In Washington, Cook feels the heat
As Trump wants a change in her seat
In Paris, the sitch
For Macron’s a bitch
As confidence there’s in retreat
 
These two stories plus so much more
Explain that we’re in, Turning, Four
So, all that we knew
Seems no longer true
Instead, there’s political war

 

The dichotomy between the general lack of price volatility in markets and the increase in political volatility over policy choices and requirements around the world is truly remarkable.  However, just like so much else that many have assumed as a baseline process for so long, this relationship appears to be changing as well.  These changes have historical precedence, as documented by Neil Howe and William Strauss back in 1997 in their seminal book, The Fourth Turning.  

Perhaps this is the best definition of what the Fourth Turning is all about [emphaisis added]:

“In the recurring loop of modern history, a final, perilous era arrives once each lifetime.  It is marked by civic upheaval and national mobilization, both traumatic and transformative.  That era, reshaping the social and political landscape, is unfolding now.”

Now, read that and tell me it is not a perfect description of what we are seeing daily, not just in the US, but around the world.  If you wondered why all the models that had been built about many things, whether financial, economic or governmental are no longer offering accurate forecasts, I would point to this as the underlying premises are going through the throes of change.

For instance, consider President Trump and his relationship with the Fed.  We already know that he and Chairman Powell are at odds and have been so for months over Powell’s reluctance to cut rates.  But his attacks on the Fed are unceasing, and last night he ‘fired’ Governor Lisa Cook for cause.  That cause being the allegations that she committed mortgage fraud, which if true is certainly a concern for a Federal Reserve Board Governor.  But this has never been attempted before so will involve legal wrangling which we will watch over the next many months.

Now, some of you may remember the last time there was a scandal at the FOMC, where two different regional Fed presidents, Dallas’s Robert Kaplan and Boston’s Eric Rosengren, were trading S&P 500 futures in their personal accounts prior to FOMC announcements of which they had inside knowledge.  Both did step down and allegedly the Fed has tightened its controls on that issue as they tried to sweep it under the rug, but let’s face it, Fed members are no angels.

I have no idea how this will play out, although I suspect that Governor Cook will eventually resign as the one thing at which President Trump excels is applying public pressure.  While Powell is an experienced public figure, Ms Cook was a professor at Michigan State, not exactly a spot where you feel the withering heat of a Trumpian attack on a regular basis.  Of course, if she did lie on her mortgage applications, that is a tough look for someone charged with overseeing the financial system.

But that is just the latest issue in the US, at least involving financial markets.  This Fourth Turning is coming alive all around the Western World, perhaps no place more than Paris this morning.  There, PM Bayrou has called for a confidence vote in order to gain the power to pass an austerity budget that cuts €44 billion from spending.  While at this point, it seems long ago, his predecessor PM, Michel Barnier, lasted just 99 days with his minority government and was ousted last December.  While Bayrou has made it for 9 months, it appears his odds of making it for a full year are greatly diminished now as all the opposition parties have promised to vote against him.  Recall, he leads a minority government and if he loses the vote, there will be yet another set of elections in France.

Again, this is emblematic of a Fourth Turning, where systems and institutions that have been operating for decades are suddenly coming apart.  From our perspective, the impact is more direct here with French equity markets (CAC -1.5%) falling sharply (see below) while French government bond yields soar.

Source: tradingeconomics.com

In fact, French 10-year yields now trade above almost all other EU nations including Greece and Spain, although Italian yields are still a touch higher.  Consider that during the European bond crisis of 2011-12, France was considered one of the stronger nations.  Oh, how the mighty have fallen!

Source: tradingeconomics.com

Again, my point is that much of what we thought we understood about how markets behave on both an absolute and relative basis is changing because the institutions underlying the Western economy are undergoing massive changes.  This is not merely a US phenomenon with President Trump, but we are seeing a growing nationalist fervor throughout the West as populations throughout Europe, and even Japan, increasingly reject the culmination of what has been described as the globalist agenda.  As John Steinbeck has been widely quoted, things can change gradually…and then suddenly.

So, let’s look at how other markets behaved overnight following the weakness in US equity markets yesterday.  Asian markets followed suit lower (Tokyo -1.0%, Hong Kong -1.2%, China -0.4%, Korea -1.0%, India -1.0%) with essentially the entire region in the red.  Europe, too, is under pressure this morning and while France leads the way, Germany (-0.4%), Spain (-0.8%) and the UK (-0.6%) are all declining in sync.  However, at this hour (7:10) US futures are essentially unchanged, so perhaps things will stabilize.

Those yields I picture above represent modest declines from yesterday’s levels, although that is only because European yields yesterday mostly climbed between 5bps and 7bps across the board.  As to Treasury yields, they are higher by 2bps this morning, but remain below 4.30%, so are showing no signs of a problem.

In the commodity markets, oil (-1.8%) is giving back all its gains from yesterday and a little bit more, but in the broad scheme of things, continues to trade in its recent range.  The one thing to watch here is Ukraine’s increasing ability to interrupt Russian production and shipment of oil via long-range drone strikes, as if they continue to be successful, it may well start to push prices above their recent cap at $70/bbl.  That is, however, a big if.  It is getting pretty boring describing metals markets as gold (+0.3%) has been trading in an increasingly narrow range as per the below chart.  This has been ongoing since April and feels like it could last another 5 months without a problem.  Silver’s chart is similar, albeit not quite as narrow a range.

Source: tradingeconomics.com

Finally, the dollar is a touch softer this morning, slipping against the euro (+0.3%), pound (+0.2%), and yen (+0.2%) with most of the rest of the G10 having moved less than that.  NOK (-0.3%) is the outlier following oil lower.  In the EMG bloc, +/- 0.3% is the range for the entire bloc today, so it appears that traders like other G10 currencies today for some reason I cannot fathom.

On the data front, we see Durable Goods (exp -4.0%, +0.2% ex Transport) as well as Case Shiller Home Prices (2.1%) and then Consumer Confidence (96.2).  Speaking of Consumer Confidence, in France this morning the latest reading was released at 87.0, three points lower than forecast and clearly trending down.  Perhaps the government’s problems are feeding into the national psyche.

Source: tradingeconomics.com

It is difficult to get excited by markets during the last week of August, and if we add the time of year, when vacations are rife, to the ongoing White House bingo outcomes, the best position seems to be no position at all.  As to the dollar, if the Fed does start to ease policy at this time, with inflation still sticky, I do foresee a decline.  However, it is very difficult to look around the world and think, damn, I want to own THAT currency, whatever currency that might be.  Perhaps the one exception would be the Swiss franc, where they really do work to have sane monetary policies.

Good luck

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A Final Bronx Cheer

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Though markets are desperate for Jay
To cut, there is fear that he’ll say
It’s not yet the time
In this paradigm
As tariffs have caused disarray
 
But truly, Chair Jay’s greatest fear
Is that ere October this year
The Prez will have chosen
A new Chair and frozen
Him out with a final Bronx cheer

 

Yesterday saw the first substantial equity market move in nearly 3 weeks, with the NASDAQ declining 1.5% as concerns arose that the current extremely high valuations would have a more difficult time being maintained if the Fed does not ease policy as widely expected next month.  This resulted in all the Mag7 declining, which given they have been the driving force higher in the market, necessarily resulted in overall index declines.

Source: tradingeconomics.com

Of course, the question is, what made yesterday any different than previous sessions.  There were no earnings results of note, and arguably, the biggest tech news was the story about the US government taking a stake in Intel, something that seems likely to have been a positive.  However, there has been an increase in chatter about what Chair Powell is going to say on Friday at his Jackson Hole speech.  Notably, in the SOFR options market, there are a large, and still increasing, number of bets being placed that Powell will indicate 50bps is on the table in September.  But Wall St analysts continue to side with the patience crowd, explaining that while the current policy settings may be slightly restrictive, they are hardly suffocating for the economy.

While Powell has repeatedly blamed an uncertain impact of tariffs on his decision to maintain current policy settings, just like everything else, this is becoming extremely political.  Trump’s allies are lining up behind him and calling for immediate rate cuts to help support the economy.  At the same time, Trump’s political foes remain focused on preventing any Fed action that might help Trump, although they couch their arguments in terms of maintaining Fed ‘independence’.

However, last night was instructive in that two central banks, New Zealand and Indonesia, cut rates further while Sweden’s Riksbank, though standing pat, explained that more cuts are possible, if not likely, later this year.  While the PBOC did not cut rates, the pressure there is building as the economic situation is very clearly slowing down, as discussed last week after their data releases.  So, with most of the world cutting rates (Japan being the notable exception), pressure continues to mount on Powell and the Fed to pick up where they left off last December.

Hanging over both Powell’s speech and the September rate decision is the fact that Treasury Secretary Bessent explained yesterday that interviews for the next Fed chair would begin around Labor Day, just two weeks from now, and nearly eight months before Powell’s term ends.  This will almost certainly weaken Powell as other FOMC members and the market will look to whomever is selected for their views, with Powell serving out his term as a lame duck.  In fact, it is for this reason that my take is Powell’s speech at Jackson Hole will be less about policy and more an attempt to burnish his legacy.

And that’s where things stand.  With no data of note today, and yesterday’s housing data being mildly positive, but not enough to change macroeconomic opinions, the narrative writers are looking for something to say and Powell’s speech is where they have landed.  Absent a run of declining days, I put no stock in a change in the market temperature at this point.  So, let’s see how things behaved overnight.

In Asia, the Nikkei (-1.5%) had a rough night in a direct response to the US tech-led selloff.  Given that US markets have stabilized this morning, with futures unchanged at this hour (7:25), we need to see a continuation here before expecting a significant further decline there.  China (+1.1%), however, bucked that weaker trend, ostensibly on hopes that the ongoing trade talks with the US will prove fruitful.  Elsewhere in the region, Korea (-0.7%) and Taiwan (-3.0%) were both hit on the tech selloff blues but other markets, with less exposure to that sector were fine.  In Europe, it is a mixed picture with the DAX (-0.4%) the laggard after weaker than expected PPI indicated that current ECB policy needs to be more accommodative to help the country but may not be coming soon.  However, the rest of the continent is little changed.  surprisingly, UK stocks (+0.3%) are holding up well despite higher-than-expected CPI data which has adjusted analysts’ thoughts on whether the BOE will be able to cut again at their next meeting.

In the bond market, Treasury yields (-1bp) continue to trade in the middle of that band I showed yesterday, while European sovereign yields have also slipped between -1bp and -2bps this morning after the softer German price data.  The UK (-4bps) is a surprise as I would not have expected lower yields after a higher inflation reading.  Perhaps this is an indication that investors are expecting a much worse economic outcome from the UK going forward.

In the commodity markets, oil (+1.3%) is bouncing, but it remains in a well-defined downtrend for now as per the below chart.

Source: tradingeconomics.com

To change this trajectory, we will need to see something alter the production schedule, which with peace on the table in Ukraine seems likely to bring more oil to market not less, or we will need to see a significantly better economic outlook that drives a substantial increase in demand, something which right now seems unlikely as well.  I cannot get on board the higher oil price bandwagon at this time.  One other thing weighing on oil is the fact that NatGas has been trending lower for the past 6 months and is now at levels not seen since last November.  In fact, those two charts look remarkably similar!

Source: tradingeconomcis.com

There is a real substitution effect here and currently oil is trading at a price that is about 4X the energy price of NatGas.  Until that arbitrage closes, and it will eventually, oil will have difficulty rallying in my view. 

In the metals markets, gold (+0.4%) which sold off a few dollars yesterday is rebounding although both silver and copper are soft this morning.  These markets are just not that interesting right now.

Finally, the dollar is little changed this morning with one real outlier, NZD (-1.2%) which responded to the dovish tones of the RBNZ last night and is pricing in more interest rate cuts now.  KRW (-0.4%) also fell on concerns over trade and the semiconductor results but otherwise, there is very little ongoing here.

The only data this morning is EIA oil inventories with a small draw anticipated.  The FOMC Minutes come at 2:00 and there will be a lot of digging to see if other members seemed to agree with Bowman and Waller in their dissents at the last meeting.  Bowman spoke yesterday, but was focused on her role as chief regulator, not monetary policy, although we hear from Waller this morning.

A down day in equities is not the end of the world despite much gnashing of teeth.  It remains difficult to get excited about markets right now.  Perhaps Mr Powell will shake things up on Friday, but my sense is we will need to wait for the next NFP data to get some action.

Good luck

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PS. A reader explained to me that in Australia, black swans are the norm, not the remarkable case as here in the US.  I guess we will need to find a new term to discuss an unexpected surprise.

What Would You Choose?

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As summer meanders along
No market is weak, nor’s it strong
But traders keep trading
With hope masquerading
As knowledge, though they know they’re wrong
 
The question is what sort of news
Can catalyze changes in views?
Seems rate cuts will not
And peace had its shot
Dear readers, just what would you choose?

 

My friend JJ (he writes the Market Vibes note) made a profound comment that described the current situation so well, I think it is worth repeating: 

“It is not that the news and fundamentals are uninteresting or unimportant. They are. But vol control has anesthetized every future, ETF, equity, and FX market, and the managers of it are making trillions on it. Therefore, it is likely this narcolepsy won’t end for a while.”

A point he has been making of late, and one with which I cannot argue, is that everything that is not algorithmic is dumb money as the algos drive it all.  And it is a fair point.  Market activity has ground to a halt, and while I have no proof, I would estimate it is even quieter than the typical year’s summer doldrums.  That seems remarkable given the panoply of news stories that exist and in other times would have had a major market impact.  Consider, war and peace in Ukraine, massive changes in federal regulations and administration priorities, and remarkable electoral shifts around the world, yet none of it matters.  Consider this chart of the US 10-year Treasury:

Source: tradingeconomics.com

The yield, which most afficionados agree is critical to not just US, but global, financial markets and activity, has largely traded between 4.0% and 4.5% since well before Mr Trump was elected.  The one thing that cannot be said is that the Trump administration has been boring.  More has happened on the fiscal front in the past six months than in entire presidential terms and yet yields are essentially unchanged since November 5th when Trump was elected.

JJ’s view is the massive increase in the use of options by retail traders has become the driving force.  Retail buys options, paying premium which decays away and that value accrues to the market making algorithms. The amounts of premium are huge, in the $trillions, and it is a straightforward business model that reaps huge rewards, so a lack of movement is the goal.  I cannot argue with that either.

However, the one thing I have learned over my too many years in the market is that no matter how smart you are, no matter how well you have considered the potential outcomes, reality will be different, and at some point, there will be a tipping point to change the market dynamic.  After all, Covid was not expected, nor even more importantly, the government responses to it which is what drove the market volatility.  I am pretty sure there is another true black swan out there, something nobody is discussing as it currently seems irrelevant or impossible, but which will alter the game.

I spent my trading career learning to manage risks while running a global FX options business, trying to profit, but more importantly preventing the huge drawdowns that end careers.  I spent my sales career trying to help my clients understand their FX risks and learn to mitigate them in the most cost-effective manner possible.  What I learned over that 40+ years is that while risks sometimes seem unimportant, or unimaginable, they exist.  Do not mistake the current state for the future state.  Things will change, although how I cannot currently imagine.

With that as preamble, let’s look at just how little things are moving.  Stocks did nothing in the US yesterday and movement overnight in Asia was lackluster as well (Nikkei -0.4%, Hang Seng -0.2%, CSI 300 -0.4%).  As I wrote above, there is just not that much that is exciting investors right now.  Europe, however, seems to be taking a positive stance on the Oval Office meeting with many of their leaders as perhaps peace in Ukraine, if it is coming, will be helpful for the continent.  Ostensibly, Presidents Trump and Putin discussed a closer economic relationship between the US and Russia, which if that came to pass, would undoubtedly rearrange some things in markets, largely to the benefit of Europe.  As to US futures, they are unchanged this morning, again.

Bond markets in Europe are exactly unchanged across the board, so much so that you would expect it was a holiday there.  Treasury yields have edged lower by -1bp, but as I explained above, are simply range trading.

I would argue the commodity markets are where there is the most potential for movement going forward as any type of US-Russian economic détente would almost certainly reduce oil prices substantially.  And, coincidentally, WTI (-1.25%) is falling this morning as hopes for a direct meeting between Putin and Zelensky, and with it the end of the war, are increasing.  Weirdly, gold (+0.35%) is not declining on that news, despite the idea that gold represents a haven against war.  Perhaps gold represents a haven against money supply growth, which if there is an economic détente, you can be sure will increase.  As to the other metals, very little movement there either.  In the vein of the lack of activity, perhaps the below gold chart is even a better descriptor of just how little activity has been going on since spring.

Source: tradingeconomics.com

Finally, the dollar is a touch softer this morning, but it, too, remains rangebound.  While much has been made of its weakness in the first half of the year, as though that calendar period had some special significance (it doesn’t), here too, things have simply ground to a halt.  Using the dollar index (DXY) as our proxy, you can see that this market, too, has done nothing for months.

Source: tradingeconomics.com

Whether it’s G10 or EMG currencies, the movement remains desultory at best, and catatonic may be a better description.

So, let’s look at the data this week that will precede Chairman Powell’s speech Friday morning.

TodayHousing Starts1.30M
 Building Permits1.39M
WednesdayFOMC Minutes 
ThursdayInitial Claims226K
 Continuing Claims1960K
 Philly Fed6.0
 Flash Manufacturing PMI49.5
 Flash Services PMI53.7
 Existing Home Sales3.91M
 Leading Indicators-0.1%
FridayPowell Speech 

Source: tradingeconomics.com

I think it is worthwhile to consider why we look at the Leading Indicators.  The original design was that it tracked a series of indicators that historically had presaged economic activity.  Ahead of recessions, these indicators turned lower and so it seemed a pretty good fit.  However, as you can see from the below chart from conference-board.org, the creators of the index, since 2021, when the index turned lower, it has been completely out of sync with the economy’s outcome.

As I have repeatedly written, models that were created pre-Covid, and many pre-GFC, simply no longer have any relevance to today’s reality.

On the whole, the most likely outcome today, like every day lately, is limited movement in either direction.  While I am sure a black swan exists, he is currently hibernating.

Good luck

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Widely Decried

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While tariffs are widely decried
By analysts, they are worldwide
But Trump’s latest scheme
To some, seems extreme
As license fees are codified
 
So, tech names, who’ve, taxes, deflected
Are now likely to be subjected
To payment of fees
To sell overseas
And revenues will be collected

 

One thing you can never say about President Trump is that he lacks innovative ideas.  Consider one of the biggest complaints over the past decades regarding US corporations; the fact that the tech companies (and drug companies) have been so effective at avoiding paying taxes based on the way they have gamed utilized the tax code and international treaties.  And this was not a partisan complaint as both sides of the aisle were constantly frustrated by large companies’ ability to not pay their “fair share” as it is often described.

It appears that President Trump has come up with a solution for this, charging a licensing fee for companies to sell overseas.  The big news over the weekend was that Nvidia and AMD are both going to pay a licensing fee of 15% of REVENUE on sales of chips to China.  In the case of Nvidia, that is anticipated to be some $2.5 billion with somewhat smaller numbers for AMD.  This is an excellent description of the process by @Kobeissiletter on X. 

I have often expressed the view that corporate taxation, if we are going to have it, ought not be on profits but on revenue.  Corporations are expert at reducing taxable income, maintaining a staff of lawyers and accountants to do just that.  But gaming top line revenues is much harder.  This gambit by President Trump is moving things in that direction.  And remarkably, given these license fees are for exports, it ought to be outside the consumer price chain in the US completely.

There is an article in the WSJ this morning titled, “The US Marches Toward State Capitalism With American Characteristics,” which outlines, and mildly complains, about the changes in the way the US government is dealing with the private sector under President Trump.  It discusses the purchase of 15% of MP Materials, the only US based miner/processor of rare earth minerals, and it discusses these license fees all under the guise of implying this is a bad direction.  And I completely understand that idea as governments tend to be terrible stewards of capital.  However, 25 years of Chinese unfettered access to Western markets while they have skirted the rules codified by the WTO have resulted in some significant national security challenges that can no longer be ignored.  Full marks to President Trump for creative methods to address these challenges, despite the wailing and teeth gnashing of economists.

But other than that story, as well as the ongoing back and forth regarding potential peace talks in the Russia-Ukraine war, not all that much has happened overnight.  For a change, markets are behaving like it is the summer doldrums, so perhaps we should be thankful for the respite.  As such, let’s take a look at how things have done and what we can anticipate this week with CPI and Retail Sales set to be released.

Friday’s US equity rally combined with the news that Nvidia and AMD will be able to export some chips to China saw modest gains there (+0.4%) and in Hong Kong (+0.2%) even though another major property company in China, China South City Holdings Ltd., is being forced into liquidation.  The property situation in China will continue to weigh on the economy there and given property investment was long seen as most Chinese families’ retirement nest egg, will undermine consumption for years.  Elsewhere in the region, there were more gainers (India, Indonesia, Malaysia, Australia, New Zealand, Taiwan) than laggards (Thailand, Philippines) with Japan closed for Mountain Day, a relatively new holiday, and other markets little changed.  

In Europe, though, screens are modestly red with losses on the order of -0.35% across the CAC, DAX and IBEX amid general uncertainties regarding the future economic direction and a lack of earnings positives.  At this hour (7:00), US futures are slightly higher, by 0.2%.

In the bond market, after last week’s auctions have been absorbed, Treasury yields have edged lower this morning, down -2bps, despite Fed funds futures’ probability of that September rate cut slipping to 88% from Friday’s 93%.  In fact, Fed Governor Bowman reiterated over the weekend that she would be voting for a cut at each of the three meetings left this year.  European sovereigns though are little changed, with some having seen yields edge higher by 1bp, as this appears to be a truly lackluster summer day.

Commodities are the only market that is seeing any movement of note, and it is not oil (+0.2%) which has been trading either side of unchanged since last night.  Rather, gold (-1.2%) is suffering this morning as you can see on the chart below as the promise of a potential peace in Ukraine seems to be removing some need for its haven status.  Of course, the thing to really note about the gold market is just how choppy trading has been as conflicting narratives continue to impinge on price movement.

Source: tradingeconomics.com

This decline has pulled down both silver (-1.4%) and copper (-0.95%) with all this happening despite virtually no movement in the FX markets.

Turning to the dollar, one is hard pressed to find any substantial movement in either G10 or EMG currencies. The true outlier this morning is NOK (+0.4%) but otherwise, +/- 0.1% or less is the best description of the price action.  This is what a summer market really looks like!

On the data front, we do get some important information as follows:

TuesdayRBA Rate Decision3.60% (current 3.85%)
 CPI0.2% (2.8% Y/Y)
 Ex food & energy0.3% (3.0% Y/Y)
 Monthly Budget Statement-$140B
ThursdayPPI0.2% (2.5% Y/Y)
 Ex food & energy0.2% (2.9% Y/Y)
 Initial Claims226K
 Continuing Claims1960K
FridayRetail Sales0.5%
 Ex Autos0.3%
 IP0.0%
 Capacity Utilization77.6%
 Michigan Sentiment62.0

Source: tradingeconomics.com

With all the hoopla about the firing of Ms McEnterfar at BLS, you can be sure that there will be lots of discussion on the CPI data regardless of the outcome.  However, as the Inflation Guy pointed out last week, imputing the bottom 30% of items in the basket, which represent something on the order of 2.5% of the total price impact, is likely to have no impact whatsoever.  We also hear from a bunch of Fed speakers, four to be exact, although Richmond Fed President Barkin will regale us twice.  Now that there are more calls for a September cut, it will be interesting to see who remains patient and who is ready to move.

And that’s all there is today.  It is hard to get excited about too much movement given the lack of obvious catalysts.  Of course, one never knows what will emanate from the White House but look for a quiet one, I think.

Good luck

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You Need to Squint

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While data continues to print
It doesn’t give much of a hint
To where things are going
Unless you’re all-knowing
And even then, you need to squint
 
The reason for this situation
Is passive flows constant inflation
No matter the news
Or anyone’s views
The target funds need their proration

 

The hardest thing about macroeconomic analysis is trying to discern whether it has any impact on market movement.  For the bulk of my career, my observation was that while there were always periods when flows dominated fundamentals, they were short-lived periods and eventually those fundamentals returned to dominance in price action.  This was true in equity markets, where earnings were the long-term driver, outlasting short-term bouts or particular manias and this was true in FX markets, where economic performance and the ensuing interest rate differentials were the key long-term driver of exchange rates.  Bond markets were virtually always a reflection of inflation expectations, at least government bond markets and commodities were simple products of supply and demand of the physical stuff.

Alas, since the GFC, and more importantly, the global central bank response to the GFC, flooding financial markets with massive amounts of liquidity, G10 economies have become increasingly finanicialized to the point where the underlying fundamentals have less and less impact and funds flows are the driving force.  The below chart I have created from FRED data shows the ratio of M2 relative to GDP.  For decades, this ratio hovered between 53% and 60%, chopping back and forth with the ebbs and flows of the economy during recessions and expansions.  But the GFC changed things dramatically and then the pandemic and its ensuing response put financialization on steroids.

By 2011, this ratio hit 60% for the first time since 1965, and it has never looked back.  The result is that there is ever more money sloshing around the economy looking for a home with the best return.  This is part and parcel as to why we have seen both massive asset price inflation as well as consumer price inflation, too much money chasing too few goods.  And this is the underlying facet in why funds flows, whether between asset classes or between nations, are the new driving force of market price action.  Michael Green (@profplum99 on X) has done the most, and most impressive, work on the rise of passive investing, which is a direct consequence of this financialization.  The upshot is, as long as money comes into the system (your semi-monthly 401K flows are the largest) they continue to buy stocks regardless of anything fundamental.  And as almost all of it is capitalization weighted, they buy the Mag7 and maybe some other bits and bobs.  It doesn’t matter about fundamentals; it only matters how much they have to buy.

So, with that caveat as to why fundamental macro analysis has been doing so poorly lately, a look at the data tells us…nothing really.  As I wrote yesterday, the two main blocs of the economy, goods production and services production, are out of sync, with marginal strength in services outweighing marginal weakness in goods production and resulting in slow growth.  Whether you look at the employment situation, the ISM data or the inflation data, none of it points in a consistent and strong direction.

For instance, yesterday’s productivity and Labor cost data were better than expected, far better than last quarter’s and pointing to an improved growth outcome.  However, if we look at the past five years of this data, we can see that labor costs have grown dramatically faster than productivity as per the below chart (ULC in grey, Productivity in blue).

Source: tradingeconomics.com

Looking at this, it is no surprise that price inflation has risen so much, given labor’s impact on prices.  But, again, this is merely another impact of the massive flow of money into the economy over the past 15 years. 

Virtually every piece of data we get has been significantly impacted by this financialization which is one reason that previous econometric models, built prior to the GFC, no longer offer effective analysis.  The system is very different.  I continue to believe that over time, fundamentals will reassert themselves, but that belief structure is under increased pressure.  Perhaps YOLO and BTFD are the future, at least until our AI overlords come into their own and enslave the human population.

In the meantime, let’s look at what happened overnight.  Yesterday’s mixed, and relatively dull, US session was followed by a mixed session in Asia with Tokyo (+1.85%) soaring on news that there were going to be adjustments, in Japan’s favor as well as rebates, to the tariff schedule.  However, both the Hang Seng (-0.9%) and CSI 300 (-0.3%) saw no such love from either the Trump administration or investors.  As to the rest of the region, red (Korea, Australia, India, Thailand, Singapore) was more common than green (Malaysia).  Apparently, tariff adjustments are not universal.  In Europe, both Spain (+0.8%) and Italy (+0.8%) are having solid sessions but they are alone in that with the other major bourses (DAX 0.0%, FTSE 100 0.0%, CAC +0.2%) not taking part in the fun.  US futures, at this hour (7:30) are higher by about 0.4%.

Bond markets, meanwhile, are sleeping through the final day of the week, with Treasury yields unchanged on the day and European sovereign yields having edged higher by just 1bp across the board.  It seems, nobody cares right now.  After all, it is August and most of Europe is on vacation anyway.

Commodity markets are showing oil (+0.6%) bouncing off its recent lows, but this seems more about trading activity than fundamental changes.  Perhaps there will be a Russia-Ukraine peace, but it is certainly not clear.  Trump’s tariffs on India for continuing to buy Russian oil are also having an impact, but as I showed yesterday, I believe the trend remains modestly lower.  Gold (-0.3%) is currently lower but has been extremely choppy as you can see from the 5-minute chart below

Source: tradingeconomics.com

This is a market where supply and demand dynamics have been impacted by both tariffs and the interplay between financialized markets (i.e. paper gold or futures) and the actual metal.  There are many theories as to different players trying to manipulate the price either higher (the Trump administration in order to revalue Ft Knox holdings) or lower (the ‘cabal’ of banks that have ostensibly been preventing the price from rising according to the gold bug conspiracy theorists).  Recently, there has apparently been less central bank demand, but that can return at any time based on political decisions.  I continue to believe that it is an important part of any portfolio, but it should be tucked away and forgotten in that vein.  As to the other metals, they are little changed this morning.

Finally, the dollar is stronger this morning, as the euro (-0.3%) and yen (-0.65%) are both under pressure and leading the way.  In fact, virtually every G10 currency is weaker (CAD is unchanged) and yet the DXY seems to be weaker as well. Something is amiss there.  Meanwhile, EMG currencies are mostly down on the session with KRW (-0.5%) the laggard, but weakness in INR (-0.2%), PLN (-0.25%) and CZK (-0.25%). 

On the data front, there is none today.  Yesterday, Atlanta Fed president Bostic explained his view that only one rate cut was likely this year, which is not what we have been hearing from other FOMC members.  Obviously, there is still uncertainty at the Fed, but they also have more than a month to decide.  Today, we hear from KC Fed president Alberto Musalem, one of the more hawkish members, so it will be interesting to see if he has changed his tune.

I would contend that confusion is the driving force in markets because data markers are not pointing in one direction nor are Fed speakers.  But it is a Friday in August so I suspect it will be a quieter day as traders look to escape to the beach for the weekend.  This morning’s trends, a higher dollar and higher stock prices, seem likely to prevail for the day.

Good luck and good weekend

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A Bevy of Doves

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The Fed has a bevy of doves
Whose world view was given some shoves
When Trump was elected
As they were subjected
To boxing, though without the gloves
 
But suddenly, they’ve found their voice
And rate cuts are now a real choice
So, bad news is good
And traders all should
Buy stocks every day and rejoice

 

Apparently, the signal has been given from on high at the Marriner Eccles building that discussing rate cuts is permitted.  Patience is no longer the virtue it was just last week.  In the past two days, three different FOMC members, Daly, Cook and Goolsbee, have returned to form and are quite open to cutting rates sooner after the recent employment data.  I would contend that rate cuts are their natural stance, but they were discouraged from expressing that view because it would put them in sync with the president, something that they very clearly have worked to avoid.  Regardless of the history, the Fed funds futures market is now pricing in a 93.2% probability of a cut next month as you can see below.  Perhaps more interesting is the fact this probability has risen from 37.7% in just the past week.  My how quickly things can change.

Source: cmegroup.com

I’m sure you recall that one of the key reasons Chairman Powell and his acolytes described the need to remain patient was the potential impact of tariffs on inflation.  This was even though the universal view was tariffs, a new tax, would be a one-off price increase, so would have no long-term impact, and that higher interest rates would do nothing to fight this particular cause of inflation, just like the price of food doesn’t respond to interest rates.  However, I want to highlight a piece from the WSJ this morning that asks a very good question, why wasn’t Powell concerned about all the tax increases from the previous administration, or for that matter, the tax increase that would have occurred had the BBB not been enacted.  Again, all the discussion that the Fed is apolitical is simply not true and never has been.

Moving on, I wanted to follow up on yesterday’s discussion as I, along with many market observers, have been trying to come to grips with the inconsistency in the data.  Some is strong, other parts are weak, and it is difficult to arrive at a broad conclusion.  My good friend, the Inflation_Guy™ put out a podcast the other day and made an excellent point, historically, there was a synchronicity between activity in the goods sector and the services sector, so when things in either sector started to decline (or rise) it took the other sector along with it.  But that is not currently the case.  

Instead, what we have seen is asynchronous behavior with the correlation between prices in the two sectors essentially independent of each other over the past five years, rather than tracking each other as they had done for the previous 30 years.  Extending the price action to overall activity, which seems a reasonable concept as prices follow the activity, depending on the data you observe, you may see strength or weakness, rather than everything heading in the same direction.  However, it is worthwhile to remember that systems in nature eventually do synchronize (see this fantastic clip) and so eventually, I suspect that both sectors will do so and a full blown recession (or expansion) will materialize.  Just not this week!

Which takes us to markets and how they have been responding to all the tariff news.  I think you can make one of the following two arguments regarding equity investors; either they have absorbed the tariff information and ensuing changes in trade behavior and have decided that earnings will continue to grow apace, or, they have no idea that there is a cliff ahead and like the lemmings they are, they are rushing toward the abyss.  Perhaps it is simply that President Trump has discussed tariffs so much that they have become the norm in any analysis thought process, and so modest adjustments don’t matter.  But whatever the reason, we continue to see strength pretty much across the board here.

The rally in the US yesterday was followed by strength across almost all of Asia with gains in Tokyo (+0.7%) and Hong Kong (+0.7%) as well as Korea, India and almost all regional bourses.  China, however, was unchanged on the session after their trade balance rose a less than expected $98.2B, as imports rose more than expected.  However, as this X post makes clear, it should be no surprise given the renminbi’s real exchange rate continues to fall, hence their exports remain quite competitive, tariffs or not.  As to Europe, strength is the word here as well (DAX +1.5%, CAC +1.2%, IBEX +0.5%) although the FTSE 100 (-0.5%) is lagging ahead of this morning’s expected BOE rate cut.  And don’t worry, US futures are higher across the board as well.

In the bond market, yields have been edging higher with Treasury yields up 2bps after yesterday’s 10-year auction was not as well received as had been hoped, but then, yields were 25 basis points lower than just a week ago, so demand was a little bit tepid.  European sovereign yields are also edging higher, mostly higher by 1bp and we saw the same thing overnight in JGBs, a 2bp rise.

In the commodity markets, oil (+0.6%) has found a short-term bottom, but is just below $65/bbl, which seems like a trading pivot of late as can be seen by the chart below from tradingeconomics.com.  As my personal bias is that the price is likely to decline going forward, the 6-month trend line heading down does appeal to me, but for now, choppy is the future.

Meanwhile, metals markets are in fine fettle this morning (Au +0.4%, Ag +1.4%, Cu +0.15%) as the dollar’s recent weakness seems to be having the expected effect on this segment of the market.

Speaking of the dollar, as more tariffs get agreed, I am confused by its weakness since I was assured that the response to higher US tariffs would be a stronger dollar.  But arguably, the fact that the Fed is suddenly appearing much more dovish is the driver right now, and while the euro is little changed this morning, we are seeing the pound (+0.4%), Aussie (+0.3%) and Kiwi (+0.4%) all move up, although the rest of the G10 space is higher by scant basis points.  In the EMG bloc, movement, while mostly higher in these currencies, is also measured in mere basis points, with INR (+0.25%) the largest mover by far.  Arguably, it is fair to say the dollar is little changed.

On the data front, the BOE did cut rates 25bps as expected, although the vote was 5/4, a bit more hawkish than forecast which is arguably why the pound is holding up so well.  US data brings Initial (exp 221K) and Continuing (1950K) Claims as well as Nonfarm Productivity (2.0%) and Unit Labor Costs (1.5%).  This is a much better mix of this data than what we saw in Q1 with productivity falling -1.5% while ULC rose 6.6%.  That was a stagflationary outcome.  In addition, we hear from two more Fed speakers, Bostic and Musalem, as the Fed gets back in gear this week.  It will be interesting to see if they are more dovish as neither would be considered a dove ex ante.

Apparently, we are back on board the bad news is good for stocks train, and it is hard to fight absent a collapse in earnings or some other catalyst.  As such, with visions of Fed cuts dancing in traders’ heads, I suspect the dollar will remain under pressure for a while.

Good luck

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Typically Dumb

Posted on by

On Friday, the market was sure
The end was nigh, and we’d be poor
The dollar was sold
And stocks mem’ry-holed
While bonds sashayed like haute couture
 
But somehow, the end did not come
As markets around the world hum
Perhaps we should learn
That markets do churn
And pundits are typically dumb

 

I admit to being confused this morning as by Friday evening, the entire narrative was that the recession was here, equity markets had peaked, and the dollar was set to collapse.  All the negative outcomes that have been prognosticated by doom pornsters were arriving and Friday was merely the first step.

And yet, here we are this morning, and not only did the sun rise in the East again, but equity markets throughout Asia also saw far more winners (China +0.4%, Hong Kong +0.9%, Korea +0.9%, India +0.5%, Singapore +1.0%, Thailand +1.25%, Philippines +0.7%) than laggards (Taiwan -0.2%, Malaysia -0.4%, Indonesia -1.0%, New Zealand -0.35%).  As to Europe, it is universally green (DAX +1.25%, CAC +0.8%, IBEX +1.4%, FTSE 100 +0.3%) and US futures, at this hour (6:35) are higher by 0.7% or so.  

Meanwhile, the dollar is higher against the euro (-0.15%), yen (-0.2%) and Swiss franc (-0.5%), although we have seen modest gains in some G10 currencies (GBP +0.15%, AUD +0.15%).  And if we look across the EMG bloc, while KRW (+0.4%) has rallied along with CNY (+0.2%), those are the outliers with the rest of the space softer by about -0.2% or so.  In other words, there has not yet been a wholesale rejection of the dollar on global foreign exchanges.

As to bond yields, after Friday’s dramatic decline, falling 15bps in the hour after the NFP report, they have largely stagnated, rising 1bp this morning.  European sovereign yields have slipped about 3bps on average as they continue the Friday move having closed before all the fun was finished.  In fact, while I have chosen the EURUSD exchange rate as a graph to depict the movement, basically every chart looks the same as this with a dislocation at the 8:30 mark on Friday and then a new range quickly established.

Source: tradingeconomics.com

I highlight this because so frequently, the narrative gets ahead of itself, and Friday was one of those days.  Yes, as I explained last night, the NFP data was weak, albeit still positive regardless of the fireworks surrounding the firing of the BLS Commissioner.  And remember, the idea that President Trump fired McEntarfar because the data displeased him does not mean she was not incompetent.  Certainly, nothing in her career demonstrates keen economic insights.  But that is still the talking point du jour.

However, that is a tired story at this point.  In fact, arguably, the reason it is getting so much press is that there is precious little else new to discuss amid the summer doldrums.  After all, the Russia Ukraine war continues apace with no end in sight, although it seems the rhetoric has increased with ex-president Medvedev seeming to threaten nuclear war and the US moving attack submarines closer to Russia.  

Texas Democratic state legislators have fled the state to avoid a special session where redistricting is due to be completed, so that has a lot of headlines, but seems likely to end like the last time this occurred, with the redistricting being completed, and Fed Governor Adriana Kugler stepped down a few months earlier than her term ends which opens another seat on the Fed for Mr Trump to fill.  

Of these stories, while our antenna should be raised given the Russia nuclear war scenario, it still seems a very low probability event, while Texas may matter in the midterm elections if they successfully redistrict as it is supposed to ensure another 5 Republican seats in the House.  But a new Fed governor, perhaps a precursor to the next Chair will have tongues wagging in the market until the seat is filled, and then until Powell is gone.

So, take your pick as to what is important.  Personally, I think the actual payroll data is the most important issue as we continue to see significant gyrations within the numbers.  Less government hiring (I read that 154,000 federal employees took the buyout) is an unalloyed good for the nation.  After all, if nothing else, given the average federal government employee salary is $106,382 (according to Grok) then that is about $16.4 billion less expenditure by the Federal government.  Every little bit helps.  In fact, all the data we have seen of late shows that the private sector continues to grow while the public sector is shrinking.  Over time, that is undoubtedly a better situation for the US and will reflect in the value of US assets.

But that’s really all there is to discuss, so let’s look at the data upcoming this week:

TodayFactory Orders-4.9%
 -ex Transport0.1%
TuesdayTrade Balance-$61.6B
 ISM Services51.5
ThursdayBOE Rate Decision4.00% (-0.25%)
 Initial Claims220K
 Continuing Claims1947K
 Nonfarm Productivity1.9%
 Unit Labor Costs1.6%
 Mexican Rate Decision7.75% (-0.25%)

Source: tradingeconomics.com

In other words, while we will hear from two more central banks as they cut rates (compared to a Fed that remains on hold, for now) it is hard to get that negative on the dollar.  Fed funds futures are pricing an 87% chance of a rate cut in September and now a 56% chance of three cuts this year, one at each meeting left, so that will weigh on the buck a bit, but if the US is cutting because recession is arriving, the economic situation elsewhere will be more dire.  After all, the US remains the consumer of last resort, and if the US pulls back, everyone else will feel it.

The big picture remains that the broader dollar trend is lower, but it is starting to make a case that trend is ending.  The data this week is largely second tier, and we need to wait until next week for CPI.  I have a feeling we will see very little net movement until then.

Good luck

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He Axed Her

Posted on by

The NFP data was weak
And President Trump did critique
The BLS head
But unlike the Fed
He axed her as pundits did freak

 

By now, I’m sure you are all aware that after a somewhat weaker than forecast NFP report, where the real damage was in the significant downward revisions to the previous months, President Trump fired Erika McEntarfer, the BLS Commissioner.  A quick perusal of her LinkedIn profile shows that she has been a government employee as a PhD economist since receiving her degree from Virginia Tech in 2002.  In other words, she has never had a real job.  

However, it is a fair question to ask if she was incompetent or politically motivated in her daily activities.  After all, it is abundantly clear there are many government workers who are ostensibly non-partisan who are, in fact, highly partisan.  As such, I took a look at the seasonally adjusted NFP data (the non-seasonally adjusted data is wildly volatile) to see if we could discern a pattern.  I created the chart below from BLS data on revisions with May 2025, the latest month with the normal two revisions, on the left and January 2007, prior to the GFC, all the way on the right.

If you look on the left side of the chart, you can see a great many negative revisions.  In fact, 21 of the last 29 months were revised lower from the original print.  If we assume that the BLS models are unbiased, then one would expect a roughly equal distribution of both positive and negative revisions over time.  It turns out, under the unbiased assumption, the probability of 21 out of 29 negative revisions is a very tiny 0.80%.

What conclusions can we draw from this?  My first thought is that the BLS models are not very effective at modeling reality.  I have raised this point many times in the past, the idea that the models that worked in the past, certainly pre-Covid, have been having trouble.  This begs the question as to why an economist of Ms McEntarfer’s long experience didn’t seek to develop a more accurate model.  As it is, there is no evidence that she did so.  I imagine as a government employee, the idea that one should change something that exists within the government framework is quite alien.  Thus, her competence could certainly be called into question, I think.

If we consider the alternative, that her actions were politically motivated, that will be more difficult to discern.  However, given the predominance of Democrat voting members of the federal government and given the fact she was appointed to this position by President Biden, it is fair to assume she is not in favor of the current administration, at the very least.  Now, during Mr Biden’s term, the initial NFP data was consistently better than expected, thus giving the impression that the economy was stronger than it may have otherwise been.  After all, stories about revised data are usually on page 12 of the paper, not headline news.  It is, therefore, possible that she was putting her proverbial thumb on the scale to flatter Biden’s economic performance.  As to her likely distaste of Mr Trump, I expect that to the extent she had the ability to do so, weaker headlines and large negative revisions would be exactly her contribution.

However, the political issue is largely speculation on my part, although I would argue it is plausible.  On the other hand, there is nothing in her background to suggest she is an especially thoughtful or creative economist and there is no indication that she examined the models she oversaw for flaws.  In the end, I come down on incompetence driving a political motive.  But I doubt we will ever know.  

Now, it is not a very good look for a leader to proverbially kill the messenger, which is essentially what Trump did.  Not surprisingly, much hair is on fire in the press and punditry, not because they though McEntarfer was particularly good at her job (I’m sure nobody had ever heard of her before) but because, as we have observed time and again, President Trump doesn’t follow their rules, and they don’t know what to do about it. 

Will this matter in the end?  This is merely the latest tempest in a teapot in my opinion and will do nothing to change the economy.  However, there is one interesting feature of the employment situation that can be directly attributed to the immigration situation.  As you can see in the FRED chart below, since March, the number of foreign-born workers has declined by 1.46 million while the number of US born workers has increased by more than 1.8 million.  I would say that as long as American citizens are finding jobs, President Trump is likely to remain quite popular across the nation despite all the negative press.

The weak NFP report altered the narrative on Friday, with bond yields, equity markets and the dollar all tumbling and the probability of a September rate cut jumping to 80%.  Perhaps President Trump is correct, and it is time to cut rates.

That’s all for this special Sunday night edition.

Good luck

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Stroke of a Pen

Posted on by

While NFP’s top of the list
For traders this morning, the gist
Of recent releases
Show more price increases
A trend that cannot be dismissed
 
As well, Tariff Man, once again
Imposed more by stroke of a pen
While stocks are declining
The dollar’s inclining
To rise vs. the euro and yen

 

Let’s get the upcoming data out of the way first as the Employment report is due to be released at 8:30. Current median expectations are as follows:

Nonfarm Payrolls110K
Private Payrolls100K
Manufacturing Payrolls-3K
Unemployment Rate4.2%
Average Hourly Earnings0.3% (3.8% Y/Y)
Average Weekly Hours34.2
Participation Rate62.3%
ISM Manufacturing49.5
ISM Prices Paid70.0
Michigan Sentiment62.0

Source: tradingeconomics.com

This report is obviously of great importance as the Fed continues to rely on a solid labor market as its key justification for not cutting rates.  At least that’s its public stance.  Recall, too, that last month’s result of 147K was significantly higher than forecast and really backed them up.  In fact, I would contend that one of the reasons that Chairman Powell was willing to sound mildly hawkish on Wednesday is because of the labor market’s ongoing performance.  

It is interesting to juxtapose this strength with the increasing number of stories about how the increase in investment and usage of AI, especially at tech firms, is driving a significant amount of personnel reductions.  And yet, the broad data continue to point to a solid labor economy.

However, I think it is worth taking a closer look at recent inflation focused data as that, too, is going to be a key driving force in the central bank debate worldwide.  Yesterday’s PCE data was largely as expected but resulted in a faster pace of inflation on both the headline and core bases.  If we consider the trend over the past three years, as per the Core PCE chart below, it appears that the nadir was reached back in June of last year, and while not every print has been higher, I will contend the trend is starting to point upwards.

Source: tradingeconomics.com

Meanwhile, if we turn our attention to European inflation data, while this morning’s Eurozone flash print was unchanged from last month, it was higher than expected.  We saw the same trend in individual Eurozone nations yesterday with Germany, Italy and France all showing the recent disinflationary trend stopping, at least for the past month.  With these recent releases, the analyst community is of the mind that the ECB is likely to hold rates steady again in September, extending the pause on their previous rate cutting cycle.  The strong belief is that US tariffs are going to dampen economic activity and, with that, inflation pressures.

As to the US, with President Trump having announced another wave of tariffs yesterday, as the 90-day window closed, once again the analyst community is calling for inflation to rise here.  Ironically, these analysts may be correct that US inflation is going to be slowly heading higher, but whether that is due to tariffs, or perhaps the fact that more than ample liquidity remains in the economy and services prices continue to rise has yet to be determined.

At this point, I think it might be useful to break out an updated version of a chart that has made the rounds before showing price changes since 2000 broken down by categories.  Virtually every sector that has seen significant price rises is on the service side of the ledger while most goods saw either deflation or very modest (~1% per annum) inflation.

Housing, which is both a good and a service, and textbooks, which are directly linked to tuition, are the two outliers.  Now, many will complain that something like New Cars having risen only 24.7% since 2000 is crazy given their much higher sticker prices, and that is clearly hedonic adjustments doing its job.  But if you consider the key expenses in your life, housing, food and health care are generally top of the requirements.  It is abundantly clear from this chart that the American angst on prices is well founded.  With that in mind, tariffs are exclusively imposed on goods, not services, so given services represent 77.6% of the US economy as of 2022 (as per Grok), the inflationary impact of tariffs seems like it might not be quite as high as the hysteria indicates.

(This is a perfect time to remind you of a great way to manage your inflation risk if you participate in the cryptocurrency markets by buying USDi, the only fully backed inflation tracking coin available.  Learn more at www.usdi.com.  It is essentially inflation-linked cash.)

Coming back around to the market, I think it is a good time to review one of the other major narrative themes, that the dollar is collapsing as foreigners flee because of the massive debt load, and that the dollar will soon lose its reserve status.  You know I have dismissed this idea from the beginning as nothing more than doom porn and an effort by some analysts to get clicks.  

There is no doubt that there had been a downtrend in the dollar for the first six months of 2025, and as has been written repeatedly, the decline was the largest during the first half of the year since the 1980’s.  As well, my concern over the dollar has been based on the idea that the Fed would indeed be cutting rates despite no need to do so, and that would undermine its yield advantage.  But a funny thing happened on the way to the death of the dollar, it stopped falling.  While I have been using the DXY chart as my proxy, pretty much every chart looks the same as per the below of both the euro and yen, where the nadir was at the beginning of July and the dollar has risen vs. both somewhere between 3% and 5%.

Source: tradingeconomics.com

In fact, as I look down my board, the dollar has risen against every major currency over the past month, with even tightly controlled CNY declining -0.8%, and the yen falling furthest, down nearly -5.0%.  Combine this with the news that Treasury auctions have been well attended with significant foreign interest, and it is hard to conclude the end is nigh for the US economy.

Ok, a really quick turn to markets here as this has gone on longer than I expected.  Equities are red everywhere this morning after yesterday’s US declines.  Japan (-0.7%), China (-0.5%) after weak PMI data, Hong Kong (-1.1%) and Australia (-0.9%) set the tone for Asia.  In Europe, it is even worse with the CAC (-2.2%) and DAX (-1.9%) both under more pressure as a combination of increased worries over trade (although given they ostensibly have a deal, I’m not sure what the issue is) and companies there reporting weaker than forecast results have been the problem.  US futures at this hour (7:30) are all pointing lower by about -0.85%.

Despite the fear in stocks, bonds are not seen as the answer this morning with Treasury yields edging higher by 1bp and European sovereign yields all higher by between 3bps and 5bps.  I guess the inflation reading has a few traders nervous.  Interestingly, if you look at the ECB’s own website showing rate change probabilities, there is a 14% probability of a rate HIKE priced in for the September meeting!  JGB yields have also edged higher by 1bp as the BOJ, in their policy briefing yesterday, raised their inflation forecasts for 2026, ostensibly as a precursor to the next rate hike there.  I’ll believe it when I see it!

As to commodities, oil (-1.1%) after touching $70/bbl yesterday has rejected the level.  While secondary sanctions on Russian oil exports continue to be discussed, they have not yet been implemented.  I continue to believe the price ought to be lower, but clearly there is a risk premium for now.  In the metals markets, gold (+0.4%) continues to find support despite weakness in other markets (Ag -0.6%, Cu -0.9%) as its millennia-long status as the only true safe haven is reasserting itself.  After all, Bitcoin (-0.6%) has not been able to match the relic’s performance of late despite its modern twist.

And that’s really all there is (I guess that’s enough) as we head into the weekend.  The market tone will be set by the NFP data, where my take is a strong report will see the dollar rally, bonds suffer, and stocks suffer as well as hopes for a rate cut fade further.  Conversely, a weak report should see the opposite impacts.

Good luck and good weekend

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Just a Bad Dream

Posted on by

Before yesterday traders whined
‘Bout how much that vol had declined
But President Trump
Caused copper to dump
And still, Chairman Powell, maligned
 
So, chaos is now the new theme
Though most hope it’s just a bad dream
And ere the week ends
Based on recent trends
We could see, results, more extreme

 

It isn’t often that copper is the talk of the town, but this is a new world in which we live, and as I’ve repeatedly explained, all that we think we knew about the way things work, or have worked in the past, is generically wrong.  It is with this in mind that I lead with a chart of the copper price, which after having rallied dramatically back in April, after Liberation Day, and again in July, both times on the back of tariff announcements, collapsed yesterday when President Trump altered the conversation by explaining that tariffs on copper would not be on the raw metal itself, but rather on refined products instead.  As you can see from the chart, this resulted in a massive decline, nearly 23% in the past twenty-four hours. 

Source: WSJ.com

Essentially, the US price, as traded on the COMEX, returned to be in line with the ROW price, as traded on the LME.  That doesn’t make the move any less dramatic, but the question of how long those price differentials could be maintained was always an open one.  At any rate, that was the biggest mover of the day yesterday and naturally, it had knock-on effects elsewhere with the entire metals complex falling sharply (Au -1.85%, Ag -3.0%, Pt -9.7%) as well as some currencies that are linked to those metals like CLP (-1.5%) and ZAR (-1.4%).  Remember how much complaining there was because market activity had slowed so much?  I bet most folks are looking wistfully at that pace this morning!

Turning to the other key focus of yesterday, the FOMC meeting, the FOMC statement was exactly as expected, with continued focus on “solid” labor market conditions and moderate economic activity acting as the rationale to leave rates on hold.  As widely expected, both Governors Bowman and Waller dissented, each calling for a 25 basis point cut.  The two schools of thought continue to be 1) headline data releases have been masking underlying economic weakness (declining home sales, declining air travel and restaurant activity); and 2) while those issues may be real at the margin, the fact that financial markets continue to rise, with significant speculative activity in things like meme coins and cryptocurrency in general, as well as Private Credit, indicate there is ample liquidity in the market and no reason to adjust policy.

This poet, while not a PhD economist (thankfully!), comes down on the side of number 2 above.  There has been talk by numerous, quite smart analysts, about the underlying weakness in the economy and how the data would be demonstrating it very soon.  Whether it is the makeup of the employment situation, the housing market showing a huge imbalance of homes for sale vs. buyers (at least at current prices) or the added uncertainty of tariffs and how they will impact the economy, this story has been ongoing for more than three years without any proof.  In fact, yesterday’s GDP reading for Q2 was a much higher than expected 3.0%, once again undermining the thesis that the economy is already in a recession.  If so, it is the fastest economic growth ever seen in a recession.

In fact, I do not understand the rationale for so many that a rate cut is necessary.  I realize the market continues to price a 60% probability of a cut in September and about 35bps of cuts by year end, but it makes no sense to me.  In fact, the market is pricing for 110 basis points of cuts through 2026.  Now, either market participants are anticipating a significant slowdown in inflation, which given all the tariff talk seems unlikely, or they see that recession on the horizon.  At this point, I have come to believe it is nothing more than wishful thinking because there is such a strong belief that Fed funds rate cuts lead to higher equity prices, and after all, isn’t that the goal?

Chairman Powell, despite all the pressure he receives from the White House, has not budged.  In this instance, I believe he is correct.  After all, if the data suddenly implodes, the Fed can cut far more substantially and do so on an intermeeting basis if necessary.  Remember, ahead of the election, he cut rates 50bps for no discernible reason based on the data.  Unemployment had risen from 3.9% to 4.2% over the prior three months and that was enough to scare him (although there was clearly a political motive as well).  If the Unemployment Rate rises to 4.5% on September 5th, they could cut that day if they thought things were really unraveling.  If the Fed is truly data dependent, then the data does not yet point to a major economic problem.  And the one thing we know about the Trump administration’s policies is they are going to try to run the economy as hot as possible.  That does not speak to lower interest rates.

Ok, let’s look at how markets around the world absorbed these changes, and how they are preparing for today’s PCE and tomorrow’s NFP data.  Despite all the noise, the DJIA was the worst performer yesterday, sliding just -0.4%, while the NASDAQ actually rallied at the margin, +0.15%.  And this morning, futures are pointing much higher (NASDAQ +1.4%, SPU +1.1%) as both Meta and Microsoft beat estimates handily.

Overnight, while Japanese shares (+1.0%) rallied nicely, China (-1.8%) and Hong Kong (-1.6%) significantly underperformed as weaker than expected PMI data put a damper on the idea that stimulus was going to solve Chinese problems.  A greater surprise is that Korea (-0.3%) didn’t perform better given the announcement that they had agreed a trade deal with the US with 15% baseline tariffs, although that may have been announced after the markets there closed.  But the rest of Asia had a rough session with most key regional exchanges (Singapore, Philippines, Indonesia, Malaysia) all declining about -1.0% with only Taiwan (+0.35%) on the other side of the ledger.  However, if we continue to see strength in the US tech sector, and trade deals keep getting inked, I suspect these markets will be able to rebound.

In Europe, the picture is also mixed, with the CAC and DAX essentially unchanged after in-line inflation readings, while Spain’s IBEX (+0.5%) reacted positively to Current Account data while the FTSE 100 (+0.5%) rallied on strong earnings data from Rolls Royce and Shell Oil.

Perhaps the most interesting aspect of yesterday was how the bond market sat out the chaos.  Treasury yields edged higher by 2bps yesterday and this morning they have fallen back by -1bp.  European sovereign yields this morning are essentially unchanged, although a few nations have seen yields slip -1bp.  In many ways, I feel that this is confirmation that despite a lot of noise, not much has really changed.

Oil (-0.5%), is giving back some of yesterday’s $2.00/bbl surge which was based on more sanctions talk from President Trump on Russia and reviving the discussion on 100% secondary sanctions on nations that import oil from Russia.  While EIA data showed a major inventory build, the talk was more than enough to spook traders.

Finally, currency markets, which have seen dollar strength for the past several sessions, are relatively calm this morning, at least in the G10, where the DXY is unchanged, although at its highest level since just before Memorial Day.  In that bloc, JPY (-0.5%) is the laggard after the BOJ left policy on hold, as expected, and while the yen has not been the market’s focus lately, it is back to 150.00 this morning for the first time since March.

Source: tradingeconomics.com

Remember all the talk about the end of the carry trade and how the yen was going to explode higher?  Me neither!  As to the EMG bloc, other than the aforementioned metals focused currencies, there has not been much movement in this space either.  However, overall, while the longer-term trend has clearly been lower, this bounce looks more and more like it is gaining strength.  The DXY is a solid 2% through the trendline and a move to 102 seems well within reason in the near term.

Source: tradingeconomics.com

On the data front, this morning brings Initial (exp 224K) and Continuing (1960K) Claims, Personal Income (0.2%) and Spending (0.4%) and PCE (0.3%, 2.5% Y/Y headline, 0.3%, 2.7% Y/Y Core) all at 8:30.  Then at 9:45 we see Chicago PMI (42.0).  There are no Fed speakers and assuming today’s data is in line, I expect that all eyes will turn to earnings from Apple and Amazon after the close and then NFP tomorrow.  So, despite yesterday’s volatility, I see a respite for the day.

Good luck

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