Tag Archives: #trump

Too Extreme

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The year is now halfway completed
While narrative writers repeated
The story, same old,
The dollar’s been sold
‘Cause global investors retreated
 
As well, they continue to scream
Trump’s policies are too extreme
His tariffs will drive
Inflation to thrive
While growth will soon start to lose steam

 

I don’t know about you, but this poet is tired of reading the same stories over and over from different pundits when it comes to the current macroeconomic situation.  And so, I thought I might take a look at what the current narrative seems to be and, perhaps, analyze some of the reasons it will be wrong.  I have full confidence it will be wrong because…it always is.  Add to that the fact that the narratives continue to try to build on expectations of what President Trump wants to do and let’s face it, there is no more unpredictable political leader on the planet right now.

In fact, we can look at one of the key narratives that had been making the rounds right up until Thursday night when the House and Senate agreed the terms of the BBB which has since been signed into law.  Serious pundits were convinced that the president could never get this done and yet there it is.

But let’s discuss another popular narrative, the end of American exceptionalism.  First, I’d like to define the term American exceptionalism because I believe that the equity analysts borrowed the term from the Ronald Reagan.  For the longest time, I would contend the term referred to the American experiment, writ large, with the dynamic market economy that was created by the legal framework in the US.  After all, no other nation, certainly not these days, has anything like this framework.  The combination of the 1st and 2nd Amendments to the Constitution have been critical in not only creating this framework but keeping it from getting too far out of hand. 

However, in the market context, American exceptionalism refers to the fact that the relative strength of the US economy drew investors from around the world into US equity markets, driving the value of US equities relative to both total global equities and the US proportion of global GDP to extreme heights.  While the chart below shows a peak just above 50% of global market cap and that number is declining right now, I have seen estimates that the number could be as high as 70% of global market cap.  I suppose it depends on how you define global market cap, but MSCI’s readings tend to be well respected.

In addition to the significant portion of equity market capitalization compared to the rest of the world is the fact that US GDP is a significantly smaller percentage, somewhere in the 23% – 26% range depending on how one calculates things with FX rates.  

The upshot is that heading into 2025, US equity valuation was at least twice the size of the US economy compared to the entire world.  Certainly, that is exceptional, and the term American exceptionalism seemed warranted.  But as you can see from the first chart, other markets have been outperforming the US thus far this year with the result that the US no longer represents quite as large a percentage of the world’s equity market capitalization.  So, is this the end of that form of American exceptionalism?  The pundits are nearly unanimous this is the case.

A knock-on effect of this is that the dollar has been under pressure all year, having declined more than 10% vs. the DXY and 13% vs. the euro.  In fact, a key factor in the weaker dollar thesis is that international investors are either selling their US stocks or hedging the FX exposure with either of those weighing on the dollar.

Source: tradingeconomics.com

Now, so far, that seems a logical conclusion and I cannot argue with it.  However, as we look forward, is it reasonable to expect that to continue?  In this instance, I think we need to head back to the BBB, which is undoubtedly going to provide significant economic stimulus to many parts of the economy (sorry green tech), and seems likely to help energy, tech and industrial companies continue to perform well.  Much has been made of the idea that American exceptionalism has peaked but I wouldn’t be so sure.  Net, I am not convinced the US ride is over, at least not for the economy, although segments of the equity market could well be in for a fall.

The other narrative that I continue to hear is that Trump’s policy mix, of tariffs and deportations is going to drive inflation much higher.  In fact, Dr Torsten Sløk, who does excellent work, explained this weekend that tariffs would raise US CPI a very precise 0.3% this year.  Of course, the problem with this story is that, thus far, inflation readings have been quite tame, falling since Liberation Day.  It is certainly early in the game, but it is not at all clear to me that tariffs are going to be a major driver of inflation.  First, many companies have decided to eat the cost themselves, notably Japanese car manufacturers.  Second, M2 in the US has basically flatlined since April 2022 (see chart below), and if money supply is not growing, inflation will be hard-pressed to rise too quickly.

Now, it is certainly possible that the Fed increases the supply of money, although given the antagonism between Powell and Trump, I sense that the Fed will remain tighter for longer as they will make no effort to help the president if the economy starts to visibly slow down.  

But, if I were to try to estimate what Trump’s end game is, I think the following chart is the most important.

This chart is the reason Donald Trump is our president, and it is one that the punditry does not understand.  It is also the reason that US equities have performed so well.  Corporate profit margins in the US have grown unabated since Covid.

Now, let’s put these two thoughts together.  Corporate profit margins have exploded higher, currently at an all-time high of 10.23%.  Meanwhile, the share of GDP that has gone toward labor has fallen dramatically since China entered the WTO.  The result has been workers in the US have seen their incomes decline relative to corporate income.  While it is true that, technically, the punditry is part of the work force, they are asset owners as opposed to Main Street who have far less invested in the equity markets.  Ask yourself, how did corporates improve their margins so significantly?  The combination of immigrant labor and moving production offshore weighed heavily on US wage growth.  If you want to understand why President Trump is speaking to Main Street and using tariffs with reckless abandon it is because he is trying to adjust this process.  

If he is successful, I expect that equity markets will lag other investments as those profit margins are likely to decline. If they just go back to pre-Covid levels of 6%, that represents a huge amount of money in the pockets of consumers.  Do not be surprised if the result is solid economic growth with lagging profits and lagging equity prices.  Too, a weaker dollar plays right into this game as it helps the competitiveness of US manufacturers both for domestic consumption and exports.

This is not the narrative, however.  The narrative continues to be that Trump’s tariffs are going to generate significant inflation and drive the economy into a recession.  In fact, just this morning I read that Professor Steven Hanke (a very smart fellow) now has a recession estimated at 80% to 90% probability.  All the uncertainty is preventing activity as corporate managers hold back on making decisions, allegedly.  Of course, now that the BBB is law, the tax situation is settled, and I will not be surprised to see investment return with clarity on that issue.

The narratives have been uniformly negative for a while.  Part of that is because many of the narrative writers objectively despise President Trump and cannot abide anything he does.  But part of that is because I believe the president is not focusing on the issues that market pundits have done for many years and instead is focusing on helping Main Street, not Wall Street.  Perhaps that is why Wall Street political donations were heavily biased toward VP Harris and every other Democrat.

I hope this made some sense to you all, as I try to keep things in context.  In addition, as it is Sunday evening, I expect tomorrow morning’s note to be quite brief.  Love him or hate him, President Trump clearly hears the sounds of a different drummer than the rest of the political class and has proven that he can get what he wants.  Do not ignore that fact.

Good luck

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Savants Disagree

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The Senate completed their vote
And so, BBB, though there’s bloat
Will soon become law
As Dems say pshaw
While lacking a doctrine, keynote
 
So, eyes now turn to NFP
The key for the FOMC
The JOLTs showed that gobs
Of ‘vailable jobs
Exist, though savants disagree

 

Market activity continues to demonstrate lower volumes and despite several competing political narratives, price action remains muted overall.  The biggest news of late is the Senate passed their version of President Trump’s BBB last night and now it goes to committee for reconciliation before getting to the president for signing.  Of course, given the mainstream media’s complete antagonism toward the president, the headlines this morning refer to the problems the Republicans will have agreeing terms between the two houses, and I’m sure it will be difficult.  However, based on everything that President Trump has done to date, I expect it will get completed.  While perhaps not by Friday, probably by next week.

This matters to markets because it will help set the tone for government spending and the potential companies that will benefit, as well as those that will be negatively impacted, based on the change in focus from that of the Biden administration.  

At this point, it is impossible to forecast with any certainty how things will evolve, especially with respect to issues like the budget deficit and debt issuance.  While yesterday, Treasury Secretary Bessent did explain that they were going to continue to focus on short-term issuance, if (and it’s a big if) the bill does goose economic activity in the US, it is quite possible that faster GDP growth increases tax collections and reduces net government spending and the deficit.  I would estimate that view is not discounted at all in markets at this time given the constant messaging from media and the punditry that not only are people going to starve to death and lose their medical care because of this bill, but that it is unaffordable and will bankrupt the country.  Something tells me the results will be slow acting, although if the government does continue its deportations and stops subsidizing too-expensive green energy projects, we could see less government spending.  We shall see.

But markets need a focus and tomorrow’s NFP is as good as it gets.  Chairman Powell has been attending the ECB’s summer symposium and, in his speech, yesterday he essentially reiterated his views that the Fed will continue to watch and wait on rates as there is still concern that tariffs may drive inflation higher.  As to jobs, they are watching the situation closely, but thus far, the labor market has held up.  Proof of that idea was evident in yesterday’s JOLTs Job Openings data which showed a surprising jump of more than 300K new job listings available.  I haven’t seen a rationale yet, but perhaps it is related to the self-deportations by illegal immigrants who have left businesses with numerous vacancies.  The weekly claims data, while above its lowest levels lately, continues to run at very modest numbers on a long-term perspective as can be seen in the chart below with data from the Department of Labor.  If the job market holds up, I don’t see the Fed cutting rates despite President Trump’s ire.

Also, at Sintra was BOJ Governor Ueda who explained that Japanese policy rates were substantially lower than neutral and that inflation would likely continue creeping higher over time.  I guess we cannot be surprised that the yen (-0.5%) has slipped in the wake of those comments.  The final noteworthy comments from Sintra were from BOE governor Bailey who explained that despite sticky inflation, more rate cuts were on the way, helping to undermine the pound (-0.4%) this morning.

But there is one final thing to discuss regarding the Sintra meeting, and that is how many central bankers were suddenly concerned that their currencies were getting “too strong”!  We have been hearing about the dollar’s decline in the first half of the year as though it was a signal the US was in permanent decline.  Of course, given the nature of FX trading, a weaker dollar can also be seen as strength in other currencies. (To be clear, all fiat currencies continue to weaken vs. stuff as evidenced by the fact that inflation continues to be positive everywhere in the world, except perhaps Switzerland and China right now.)  However, I could not help but laugh at the ECB comments from several board members, that if the euro were to rise any further it could become a problem for the Eurozone economies.  All their models show that if a major export destination raises tariffs, their own currencies should decline to offset those tariffs.  Alas, once again, their models are not giving them answers that reflect the reality in markets.  And given Europe has built their economies on export reliance, a strong currency is a problem.

We must distinguish between a stronger exchange rate and a strong case to own a currency, especially as a reserve asset, but the two have historically been highly correlated.  As I have repeatedly explained, the dollar’s decline this year is neither anomalous nor particularly large in the broad scheme of things.  As well, it is exactly what the administration is seeking as it helps the competitiveness of US companies on the world stage.  However, my take is that at some point soon, the dollar will find a bottom.  I indicated a move to 90 on the DXY would be possible, and I think that is probably still true, although given the growing net short positions in USD vs. other currencies, the short squeeze will be spectacular when it arrives!

Ok, let’s see if we can get through the overnight activity without falling asleep.  Yesterday’s mixed US session was followed by a mixed session in Asia (Nikkei -0.6%, Hang Seng +0.6%, CSI 300 0.0%) with a mixture of modest gains and losses across the rest of the region, all on low volumes.  In Europe this morning, bourses are firmer led by the CAC (+1.1%) and Spain’s IBEX (+0.75%) as hopes for further rate cuts from the ECB dominate discussions.  As to US futures, they are modestly higher at this hour (7:30), about 0.15%.

In the bond market, after stronger than expected JOLTs data and ISM data, yields are backing up with Treasuries (+4bps) leading the way although both Germany (+5bps) and the UK (+6bps) are seeing selling pressure as well.  However, the rest of European sovereigns have only seen yields edge 1bp higher.  The only noteworthy comments I saw were from the Italian FinMin who explained Italy would be maintaining its fiscal prudence.  Not surprisingly, given Ueda-san’s comments, JGB yields rose 4bps overnight as well.

In the commodity space, oil (+1.25%) continues to drift higher as it tries to fill the gap seen last week.

Source: tradingeconomics.com

Apparently, the fact that supply seems to be rising rapidly has not dissuaded traders from the view that the ‘proper’ price range is $65-$75 rather than my belief of $50-$60.  But right now, they are looking smart.  In the metals markets, we continue to see support as the entire decline in the gold price at the end of June has been recouped and we are modestly higher this morning across all the metals (Au +0.1%, Ag +0.6%, Cu +0.4%, Pt +2.2%) with platinum merely showing its volatility due to lack of liquidity.

Finally, the dollar is firmer this morning against every one of its G10 and major EMG counterparts with the euro and pound (both -0.4% now) setting the tone.  Perhaps the best performer this morning is INR (-0.1%) which seems to be benefitting from the news that a trade deal is almost complete there.  As to trade with the Eurozone, that deal seems a bit further away, although I did see something about a European recognition that US tariffs would be, at a minimum, 10%.  At least for today, I haven’t read anything about the dollar’s ultimate demise!

On the data front, today brings ADP Employment (exp 95K) and then the EIA oil inventory data.  There are no Fed speakers either, so quite frankly, absent something newsworthy from DC, I suspect this will be a quiet session ahead of tomorrow’s NFP.  I guess the dollar is not dead yet.

Good luck

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The Perfect Riposte

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Attention right now’s being paid
To Congress on taxes and trade
The One BBB
Is seen as the key
To growth in the coming decade
 
Meanwhile, Sintra right now’s the host
To Powell, Lagarde and almost
All central bankers
Each one of whom hankers
To nurture the perfect riposte

 

The headlines this morning highlight that Congress put in an all-nighter last night as they try to get the BBB over the line and on the president’s desk by Friday.  My take is they were seeking sympathy for all the hard work they must do and trying to make it seem like they are slaving away on their constituents’ behalf.  Yet it appears that since the president’s inauguration on January 20, 161 days ago, Congress has been in session for somewhere between 40 and 50 days (according to Grok), about one-quarter of the time.  I have seen these estimates elsewhere as well, and quite frankly, it doesn’t speak well of Congressional leadership.  

In the end, though, I continue to expect the BBB to get passed by both houses and sent to the president.  I’m certain there are still a lot of things in the bill that many fiscal conservatives will not like, but I’m also confident that the fact that not a single Democratic representative or senator is going to vote for the bill is likely a sign that it does more good than harm.  I am completely aware of the debt and deficit issues and questions of their long-term sustainability, and I am not ignoring that.  But politics is the art of the possible, not the perfect, and my take is this is possible.  Consider for a moment the Orwellian-named Inflation Reduction Act from 2022, which passed the Senate on a tiebreaker vote by VP Harris.  That was a much more harmful piece of legislation from a fiscal perspective than this.  In fact, I would say this is the very definition of politics.

Through a market lens, if (when) this is passed, while there may be an initial ‘sell the news’ move, I suspect that the stimulus it entails will be a net benefit for risk assets overall.  And the only reason there would be a sell the news event is that the market is already pricing in a great future as evidenced by yesterday’s quarterly close at new all-time highs for the S&P 500, above 6200.

Turning to the other noteworthy news, the ECB is holding their faux Jackson Hole event this week in Sintra, Portugal where all the heads of major central banks are currently gathered along with academics and journalists who are there to spread the good word.  Chairman Powell speaks today, but this is the Powell story of the day.  Apparently, President Trump had this hand-written note delivered to the Fed Chair.  Are we not entertained?

But ignoring for a moment the president’s desires, let us consider the dollar and its potential future direction.  The predominant current thinking is that it has further to slide as the trend is clearly lower and the rising anticipation of a recession in the US forcing the Fed to cut rates further will undermine the greenback.  Let’s break that down for a moment.  There is no question the dollar is currently in a downtrend as evidenced by the chart below.  A look at the red line on the right shows the slope of the decline thus far this year, which totals about 11%.

Source: tradingeconomics.com

In fact, much has been made of the decline thus far this year as to its speed and how it is a harbinger of both a recession and the end of the dollar’s hegemony.  Yet, we don’t have to go very far back in time, late 2022-early 2023 to see a virtually identical decline in the dollar over a slightly shorter period, hence the steeper slope of the line in the center of the chart, and I cannot find a single descrying of the end of the dollar at that time. Too, I remember being certain a recession was on the way then, when it never arrived.  According to JPMorgan, it seems the recession probability for 2025 is now 40%.  I have seen estimates ranging from 25% to 80% over the past few months which mostly tells me nobody has any idea.

We also don’t have to go very far back in time to see when the dollar was substantially weaker than its current levels.  I’m not sure why this time the dollar’s recent trend means the world is ending when that was not the case back in 2023 or any of the myriad times we have seen movement like this in the past.

But one other thing to consider regarding the dollar is that the BBB is going to provide significant stimulus to the economy.  Combining this with President Trump’s trade policies which are designed to draw investment into the US, and seemingly are working, and I think that despite his desire for lower interest rates, the Fed will have little reason to cut amid stronger growth in the economy.  I do not believe you can rule out a turn in the dollar higher once the legislation is passed as it is going to matter a great deal.  While spending priorities are going to change, it appears that investment is going to rise and that will help the buck.  Be wary of the dollar is dying thesis.

Ok, yesterday’s market activity, while reaching record highs in the equity markets, was actually incredibly slow with volumes shrinking.  My sense is folks are on holiday this week and those who aren’t are waiting for Thursday’s NFP data, so they can then run out of the office and go for their long weekend.  But the rest of the world doesn’t have the holiday Friday and are all trying to solve their trade situation with the US.  That led the Nikkei (-1.25%) lower yesterday as there appears to be a timing mismatch from a political perspective.  Ishiba doesn’t want to agree to open Japan’s market to US rice ahead of the election on July 20th as that will be a major political problem, but July 9th is approaching quickly, and Trump has said that is the date.  But aside from Japan and Hong Kong (-0.9%) the rest of the region had a pretty solid session led by Thailand (+2.1%) and Taiwan (+1.3%).  In Europe, though, PMI data was less than stellar, and bourses are modestly softer (DAX -0.5%, CAC -0.4%, FTSE 100 -0.3%) although Spain’s IBEX (+0.2%) has managed a gain as they had the best PMI outcome of the lot.  

In the bond market, yields continue to slide everywhere with Treasuries (-4bps) actually lagging the Eurozone which has seen declines of -6bps virtually across the board.  Madame Lagarde, in her Sintra opening speech, explained that the ECB would be altering their communication strategy to try to take account of the uncertainty in their forecasts, so not promise as much, but I have a feeling the movement is more a result of the softer PMI data as well as the Eurozone inflation release at 2.0% which has ECB members explaining things are under control.  Japan is a bit more confusing as JGB yields (-4bps) slipped despite what I would consider a strong Tankan report and a rise in their PMI data.  However, the newest BOJ board member did explain there was no reason to raise rates anytime soon, so perhaps that is the driver.

In the commodity markets, oil (+0.8%) continues to creep higher, perhaps a harbinger of stronger future economic activity around the world, or perhaps more short covering.  Gold (+1.4%) has completely erased the dip at the end of last week and is back at its recent pivot point of $3350 or so.  This has brought silver (+1.1%) and copper (+0.7%) along for the ride.

Finally, the dollar is clearly softer this morning with JPY (+0.6%) the leader in the G10 while ZAR (+0.9%) is the leading gainer in the EMG bloc as it follows precious metals prices higher.  Net, I would suggest that the average move here is about 0.25% strength in currencies.

On the data front, we get ISM Manufacturing (exp 48.8) and Prices Paid (69.0) and we get the JOLTs Job openings (7.3M) this morning.  Too, at 9:30, Chairman Powell speaks so it will be interesting to see if there is any change in his tune.

I see no reason for the dollar to turn higher right now but watch for the BBB.  Its passage could well change the dollar’s direction.

Good luck

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Over the Hump

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It’s beautiful and it’s quite big
Though more complicated than trig
But President Trump
Got over the hump
Though sans views that he is a Whig
 
As well, Friday’s Canada rift
Has ended, boy that was sure swift
Now, this week we’ll learn
If there’s still concern
‘Bout jobs, or if there’s been a shift

 

The weekend news revolves around the fact that the Senate has passed the BBB with a 51-49 vote, and it now moves to committee so both Houses of Congress can agree the final details before it gets to President Trump’s desk for signature and enactment.  This is another victory for the President, adding to last week’s wins and remarkably there have been several others as well.  The Supreme Court ended the ability of a single district court judge to injunct the entire nation based on a single case, a move that will prevent judges who disagree with the president from stopping his policy efforts.  Then, Canada announced they were going to impose a tax on US technology companies (the one that the Europeans just killed) and after Mr Trump ended the trade dialog quite vociferously, Canada backed down from that stance and is back at the negotiating table.

I mention this not to be political but as a backdrop to what is helping to drive the improved sentiment in US markets for both equities and bonds.  While a quick look at YTD performances of US equity indices vs. Europeans shows the US still lags, that gap is narrowing as the news cycle continues to point to positive things happening in the US.  Certainly, my understanding of the BBB is that it is quite stimulative, although it is changing priorities from the previous administration.

More interestingly, the Treasury market, which has been the subject of many slings and arrows lately from the part of the analyst community that continues to worry about refinancing the growing US debt pile, continues to behave remarkably well.  A quick look at the chart below shows that 10-year yields have been trending lower for the past 6 months, at least, and this morning are continuing that trend, slipping another -3bps.

Source: tradingeconomics.com

My point is that despite relentless doom porn regarding the economy, the big picture continues to point to ongoing growth in economic activity.  There are many anecdotes regarding the impending weakness, (the latest I saw was the increase in the number of credit card purchases that have been rejected is rising rapidly) and yet, the main data has yet to crack and roll over to point to a clear sign of significant slowing.  Perhaps this week when the NFP report is released on Thursday (Friday is July 4th holiday), we will see that long-awaited decline.  However, as of this morning, the Fed funds futures market continues to price just a 21% probability of a July rate cut as forecasts for NFP show the median to be 110K. 

While I completely understand the concerns that the doomers recite, I have come to understand that the idea of a recession is a policy choice, not a natural phenomenon.  While in the past, the business cycle was more powerful than the government, that is no longer the case.  Rather, what we have observed over the past 15 years at least, since the GFC and the onset of QE, is that the government has become a large enough part of the total economy to drive it at the margin.  And I assure you, if a recession is a policy choice, there is not a politician that is going to choose one.  Perhaps we will reach a point where the imbalances get beyond the control of the central banks and their finance ministries, but we are not there yet.

Ok, let’s take a peek at the overnight price action.  Despite all the spending promises by governments around the world, yields have slipped everywhere with all European sovereigns taking their lead from the US and lower this morning by -2bps to -3bps.  Even JGB yields (-1bp) have managed to decline slightly.  If inflation fears are building, they are not obvious this morning.

In the equity markets, Friday’s US rally was followed by most Asian bourses rising (Nikkei +0.8%, Australia +0.3%, China +0.4%) although HK (-0.9%) slipped after Chinese PMI data was released that indicated things weren’t collapsing, but that future monetary stimulus may not be coming after all.  The worst of both worlds for stocks.  Meanwhile, European exchanges are mostly a touch softer, but only on the order of -0.2%, so really very little changed amid light volume overall.  Interestingly, US futures are solidly higher at this hour (7:00), rising by 0.55% across the board.

In the commodity markets, oil (-0.35%) is slipping a bit, but is basically hanging around near its recent lows as the market remains unconcerned about an escalation of fighting between Iran and Israel and any possible closure of the Strait of Hormuz.  Meanwhile, gold (+0.4%) is bouncing from a weak performance Friday which appears to have been a bit oversold, although copper and silver are not following suit this morning with the former (Cu -0.7%) the laggard.  However, all the metals remain sharply higher this year and in strong up trends.

Finally, the dollar is modestly softer again this morning with KRW (+0.9%) the biggest mover, by far, while the entire G10 complex is showing gains on the order of 0.1% to 0.2%.  This trend lower in the dollar remains strong (see chart below), but as I continue to remind everyone, we are nowhere near an extreme valuation in the dollar.  If, and it’s a big if, we see substantial weakening in the employment data, I think the Fed could decide to act and that would increase the speed of the downtrend (as well as goose inflation higher), but absent that, I do not see a sharp decline, rather a slow descent.  Remember, this is exactly what Trump and Bessent want, a more competitive dollar for the manufacturing sector.

Source: tradingeconomics.com

As it is the first week of the month, there is plenty of data to digest.

TodayChicago PMI43.0
TuesdayISM Manufacturing48.8
 ISM Prices Paid69.0
 JOLTs Job Openings7.3M
WednesdayADP Employment 85K
ThursdayNonfarm Payrolls110K
 Private Payrolls110K
 Manufacturing Payrolls-6K
 Unemployment Rate4.3%
 Average Hourly Earnings0.3% (3.9% y/Y)
 Average Weekly Hours34.3
 Participation Rate62.3%
 Initial Claims240K
 Continuing Claims1960K
 ISM Services50.5
 Factory Orders8.0%
 -ex Transport0.9%

Source: tradingeconomics.com

In addition to the payrolls, we hear from Chairman Powell again on Tuesday and Atlanta Fed president Bostic twice.  I guess the rest of the FOMC took a long holiday week(end).

As it’s a holiday week, I expect that activity will be light, although headline bingo remains a key part of the markets today.  I feel like the trends are well entrenched though, with the dollar slipping, equities and commodities rallying and bonds currently leaning toward lower yields, although that seems out of sync with the other markets.  But in the summer, with less liquidity and activity, anomalies can continue for a while.

Good luck

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Full Schmooze

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The temperature’s starting to fall
With Israel and Iran’s brawl
On hold for the moment
Though either could foment
Resumption, and break protocol
 
But that truce combined with the news
That Trump’s team are pushing full schmooze
On trade, has the markets
Increasing their bull bets
While skeptics are singing the blues

 

President Trump is having a pretty remarkable week.  The successful attack and destruction of Iran’s nuclear enrichment facilities combined with the news that the US and China have agreed the details of the trade framework that was outlined in Geneva and followed up in London has market participants feeling a lot better about the world this morning.  Add to that the news that a particularly onerous part of the BBB, Section 899, which was nicknamed the Revenge clause for its tax targeting anybody from nations that imposed excess taxes on US companies internationally, being stripped after negotiations with European leaders, and the fact that NATO has gone all-in on increasing their spending, and Mr Trump must be feeling pretty good this morning.  Certainly, most markets are feeling that, except those that thrive on chaos and fear, like precious metals.

In fact, this morning it seems that the entire discussion is a rehash of what has occurred all week with very little new added to the mix.  Data from the US yesterday was mixed, with Claims a bit softer and Durable Goods quite strong while the third look at Q1 GDP was revised lower on more trade data showing imports were greater than first measured while Consumer Spending and Final Sales were a bit weaker than expected.  Net, there was not enough to push a view of either substantial strength or weakness in the economy, so investors and their algorithms continue to buy shares.

The other story that continues to get airplay is the pressure on Chairman Powell and questions about whether at the July meeting Fed governors are going to vote against the Chairman.  Apparently, it has been 32 years since that has occurred (and you thought they were actual votes!) and the punditry is ascribing the dissent to politics, not economics.  It should, of course, be no surprise that there is a political angle as there is a political angle to every story these days, but the press is particularly keen to point out that the two most vocal Fed governors discussing rate cuts were appointed by Trump.

However, despite all the talk, the futures market does not appear to have adjusted its opinion all that much as evidenced by the CME chart of probabilities below.  In fact, over the past month, the probability of a cut has declined slightly.  Rather, I would contend that on a slow news Friday, the punditry is looking for a story to get clicks.

The last story of note is about the dollar and its ongoing weakness.  This is an extension of the Fed story as there is alleged concern that if the Fed is perceived to lose some of its independence, that will be a negative for the dollar in its own right, as well as the fact that the loss of independence would be confirmed by a rate cut when one is not necessary (sort of like last autumn prior to the election.  Interestingly, I don’t recall much discussion about the Fed’s loss of independence then.)

But, in fairness, the dollar has continued to decline with the euro trading to its highest level, above 1.17, in nearly four years.  It is hard to look at the story in Europe and think, damn, what a place to invest with high energy costs and massive regulatory impediments, so it is reasonable to accept that what had been a very long dollar position is getting unwound.  But look at the next two charts (source: tradingeconomics.com) of the euro, showing price action for one year and for five years, and more importantly notice the trend lines that the system has drawn.  There is no doubt the dollar is under pressure right now, but I am not in the camp that believes this is the beginning of the end of the dollar’s global status.  Remember, too, that President Trump would like to see the dollar soften to help the export competitiveness of the US, and so I would not expect to hear anything from the Treasury on the matter.

However, while these medium and long-term trends are clear, the overnight session was far less exciting with the largest move in any major currency the ZAR (+0.5%) which is despite the decline in gold and platinum prices.  Otherwise, today’s movement is basically +/- 0.2% across both G10 and EMG currencies.

Speaking of the metals, though, they are taking it on the chin this morning as we approach month end and futures roll action.  Gold (-1.3%), silver (-1.7%), copper (-0.9%) and platinum (-4.4%) are all under pressure, although all remain significantly higher YTD.  However, to the extent that they represent a haven and the fact that havens seem a little less necessary this morning seems to be the narrative driver adding to the month end positioning.  Meanwhile, oil (+0.5%) continues to bounce ever so slowly off the lows seen immediately in the wake of the bombing attacks.

Circling back to equity markets, after a nice day in the US yesterday, with gains across the board approaching 1% and the S&P 500 pushing to within points of a new all-time high, Japan (+1.4%) followed suit as did much of the region (India, Taiwan, New Zealand, Indonesia) but China (-0.6%) and Hong Kong (-0.2%) didn’t play along.  Europe, though, is having a positive session with gains ranging from 0.65% (DAX) to 1.3% (CAC) and everything in between.  It seems that the NATO spending news continues to support European arms manufacturers and the cooling of tensions in the Middle East has lessened energy concerns.  US futures are also bright this morning, up about 0.5% at this hour (7:40).

Finally, bond markets are selling off slightly after a further rally yesterday and yields since the close have risen basically 3bps in both Treasury and European sovereign markets.  There is still no indication that any government is going to stop spending, rather more increases are on the horizon, but there is also no indication that central banks are going to stop supporting this action.  No central bank is going to allow their nation’s bond market to become unglued, regardless of the theories of what they can do and what they control.  Ultimately, they control the entire yield curve.

On the data front, this morning brings Personal Income (exp 0.3%), Personal Spending (0.1%) the PCE data (Core 0.1%, 2.6% Y/Y; Headline 0.1%, 2.3% Y/Y) and at 10:00 Michigan Consumer Sentiment (60.5) and Inflation Expectations (1yr 5.1%, 5yr 4.1%).  There are several more Fed speakers, including Governor Cook, a Biden appointee who is a very clear dove, but has not yet agreed that rate cuts make sense.  It will be interesting to see what she has to say.

It is a summer Friday toward the end of the month.  Unless the data is dramatically different than forecast, I expect that the dollar will continue to slide slowly for now, although I do expect the metals complex to find a bottom and turn.  As to equities, apparently there is no reason not to buy them!

Good luck and good weekend

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He’s the Worst

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The talking points have been disbursed
With narrative writers well-versed
The dollar is falling
‘Cause Trump is now calling
For Powell to leave, “He’s the worst!”
 
The idea is Trump will soon name
The next Fed Chair, turning Jay lame
This shadow Fed Chair
Will have to beware
Since he’ll, for bad outcomes, get blame

 

The dollar is weaker this morning and if we use the Dollar Index as a proxy, it has fallen to its lowest level since February 2022.  

Source: tradingeconomics.com

While certainly a part of this movement has been the fact that US yields continue to slide lately, it also seems there is a new narrative that has been distributed to journalists, the dollar is falling because President Trump is considering naming a new Fed Chair much earlier than usual in an effort to undermine Chairman Powell.  We have all heard about the rants the President has had regarding Powell’s unwillingness to cut rates even though inflation readings have been declining for the past two months, and are, on a Y/Y basis back to their lowest level since March 2021 whether measured as CPI (grey line) or Core PCE (blue line).

Source: tradingeconomics.com

But in an exclusive (!) article in the WSJ, which was repeated in Bloomberg, that is the story du jour.  While Bloomberg’s take cannot be a surprise given Mayor Mike’s intense hatred of Trump (after all Trump is the NY billionaire that became president, not Bloomberg), and editorial direction clearly comes from the top, it is more interesting that the Journal is pushing this theme.  Of course, given the Fed whisperer is the article’s writer, it is more than possible that he is simply airing Powell’s views and trying to explain how any move like this would result in chaos, so it’s not Powell’s fault if things go pear-shaped.

Nonetheless, that is today’s story.  In concert with this story, though is another, somewhat more interesting feature, where a really smart analyst, Marko Papic, has broken down the dollar’s movements across different time zones during 2025.  The chart below shows that the dollar selling has been emanating from Asia mostly with Europe having a lesser impact and no substantive change in the NY session.  The implication is that Asian holders of dollars, which tend to be sovereigns rather than other users like investors or corporates, are the ones bailing out.

This activity first became noticeable in early April, right around “Liberation Day” and does fit with the idea that higher US tariffs will result in a smaller US trade deficit.  But as I consider that concept, it strikes me that a smaller US trade deficit will result in fewer dollars around the rest of the world, a reduction in supply, and that would arguably increase the dollar’s value ceteris paribus.  Perhaps this reflects investors selling US assets and converting them to Europe, which has been another theme this year as European companies are set to benefit from a major increase in defense spending by NATO.  However, that doesn’t really sync with the fact that US equities continue to trade near all-time highs.  At this point, I think this is an interesting observation, but am not sure of its meaning.  I’m open to suggestions.

Ok, while that is the narrative this morning, let’s look at how markets are behaving.  Yesterday’s lackluster activity in the US, with the S&P 500 almost exactly unchanged and the other two main indices +/- 0.3% was followed by a burst higher in Tokyo (Nikkei +1.6%) but lagging activity in HK (-0.6%) and China (-0.4%).  The rest of the region couldn’t decide on much with a couple of solid performances (India, Indonesia) and one laggard of note (South Korea).  In Europe, Germany (+0.6%) is leading the way higher across the board, as NATO countries have promised to spend upward of 5% of GDP on total defense (including nonlethal investments), with as much as possible going to European based companies.  That is a lot of money, well over $1.5 trillion.  Meanwhile, US futures are all higher at this hour (7:15), up by about 0.4% or so.

In the bond market, Treasury yields (-2bps) continue to slip and are now back to their lowest level since early May.  Perhaps more interestingly, European sovereign yields are sliding today as well, led by Italian BTPs (-4bps) but lower across the board.  This is interesting given the promises of more borrowing based on the NATO announcement.  But net, bond yields have not really done very much lately at all.

In the commodity markets, oil (+0.5%) is continuing to slowly bounce from the initial lows in the wake of the Iran/Israel ceasefire.  This market still feels quite heavy to me and absent a major change on the ground in the Middle East, if war were to resume and oil facilities be attacked, I still think lower is the way.  In the metals markets, gold (+0.25%) which tried to sell off yesterday continues to find bids below the market, likely central bank support.  But silver (+0.9%) and copper (+2.3% and above $5.00/lb) are looking good although nowhere near as impressive as platinum (+3.4%) which has now risen above $!400/oz and is going parabolic here.  There is much talk here about a supply shortage (it is used for catalytic converters) and significant Chinese demand.

Source: tradingeconomics.com

Finally, the dollar, as mentioned, is under pressure across the board, although the magnitude of this morning’s movement has not been that large.  The largest movement has been in Asia with IDR (+0.6%), JPY (+0.4%) and KRW (+0.35%) while European and LATAM movements have been generally 0.2% or less.  So, the direction is clear, but it has not been impressive.

On the data front, there is plenty today starting with the weekly Initial (exp 245K) and Continuing (1950K) Claims, the Chicago Fed National Activity Index (-0.1), the last look at Q1 GDP (-0.2%), and Durable Goods (8.5%, 0.0% ex-Transports).  We also hear from four more Fed speakers, but Powell just repeated yesterday that they are happy where they are and unlikely to move soon unless something really changes rapidly.  However, despite Powell’s claims of nothing to come, the Fed funds futures market is pricing a 25% probability of a cut at the July 30 meeting.  There is a lot of time between now and then for that to change.

I keep trying to figure out what actually matters to markets anymore as responses to different potential catalysts seem confused.  People do seem to be coalescing around the dollar is falling theme, something I have believed for a while, and if the Fed does lean to a cut next month, I do believe there is further for it to fall.  One thing to remember, though, is with Mr Trump as president, things are still a tweet away from a dramatic change.  If I were in charge of hedging risk, I would adhere to guidelines closely.  There is too great an opportunity for a sudden major reversal in the current environment.

Good luck

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What He Will Mention

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Last night there was, briefly, a peace
This morning, though, that seemed to cease
But worries Iran
From Hormuz, would ban
Most ships, have now greatly decrease(d)
 
So, markets have turned their attention
To Powell and what he will mention
When he sits before
The Senate once more
Though most seated lack comprehension

 

Talk about yesterday’s news!  While I am pretty confident we have not heard the last of the Iran/Israel conflict, it has dropped off the radar in a NY minute.  Last night President Trump announced a cease fire between the two nations and while Israel alleged that Iran already broke the peace, the market has clearly moved on from the erstwhile WWIII concept to WWJS (What Will Jay Say).  In that vein, this morning’s WSJ had an articlefrom the Fed whisperer, Nick Timiraos, describing the trials and tribulations of poor Chairman Powell as he tries to fend off those mean words from President Trump.  

Powell sits down before the Senate Banking Committee this morning, and the House Financial Services Committee tomorrow, ostensibly to describe the state of the economy and the Fed’s current thinking.  I have begun to see discussions that two Trump appointed governors, Bowman and Waller, are now interested in potentially cutting the Fed funds rate in July and the futures market has raised the probability of a cut next month to 23%, back to the levels seen a month ago, pre-war and prior to a run of stronger than expected economic data.

Source: cmegroup.com

Frequently mentioned throughout the WSJ article was the idea of Fed independence and how critical that is for monetary policy to be effective.  As well, the fact that the comments on rate cuts are from governors Trump appointed, and that is being highlighted in a negative fashion, is further evidence that the Fed remains a highly political, and quite frankly, partisan organization.  One cannot look at the rate cuts last autumn ahead of the election, which were certainly not warranted by the data, as anything other than the Fed’s attempt to support VP Harris’s presidential campaign.  And when inflation was still quite high, although starting to decline, calls for cuts by Biden appointees Cook and Jefferson, were also likely politically motivated given the still high inflation rate.  

In fact, I wonder where Governor’s Cook and Jefferson are today with respect to rate cuts.  After all, both have demonstrated dovish biases throughout their tenure at the Fed, but suddenly they are strangely silent on the subject.  I’m sure that is not a political bias showing, but rather deeply considered economic analysis. 🙃

I do find it interesting that there is an underlying presumption that the Fed funds rate is always too high, at least for the narrative, although I guess that is because most narrative writers believe strongly in the idea if rates are low, stock prices will rise.

Regardless of the politics, Powell will very likely explain that there is still concern that tariffs could raise prices and while there is the beginning of concern over the labor market, it remains solid and does not warrant rate cuts at this time.  Of course, we will also be subject to the preening of all those senators (what is the probability that Senator Van Hollen brings up deportations?) with no useful discussion.  It seems unlikely that Chairman Powell will alter his message from the post meeting press conference which remains, patience is a virtue.

Ok, now that the war has ended, let’s see how markets have behaved.  I must start with oil (-3.0% today, -12.0% since yesterday morning) where traders have removed the entire Hormuz closing premium and are now dealing with the fact that there are more than ample supplies around.  Recall, OPEC+ continues to increase production, and the macroeconomic narrative remains one of slowing economic activity.  Happily, gasoline prices are following oil lower so look for less inflation concerns for next month.

Source: tradingeconomics.com

Meanwhile, with war off the table, gold (-1.3%) is no longer in such great demand although silver (unchanged) and copper (+0.7%) continue to find support.  Net, my longer-term views remain that oil prices have further to decline while metals prices should grind higher over time.

In the equity markets, you have to search long and hard to find a market that didn’t rally overnight or is in the process of doing so this morning.  After yesterday’s strong US closing (all three main indices up about 0.9%), Asia (Nikkei +1.1%, Hang Seng +2.1%, CSI 300 +1.2%) rallied sharply with Korea (+3.0%) really popping and only one negative, New Zealand (-0.5%) where local traders cannot seem to get on board with the better news.  In Europe, the gains are also substantial (DAX +1.8%, CAC +1.2%, IBEX +1.4%) although the UK (+0.3%) is lagging given the large weighting of energy in the index.  US futures are also pointing higher this morning, about 0.8%.

In the bond market, Treasury yields are unchanged this morning after slipping -3bps yesterday, but we are seeing yields rise in Europe (Bunds +5bps, OATs +3bps) after the Germans announced they would be borrowing 20% more this quarter than initially expected to help their rearmament program.  I guess investors had a mild bout of indigestion.

Finally, the dollar, which rallied nicely into yesterday’s NY opening has basically reversed all those gains since then and is back trading near 98 on the DXY. While there are various relative sizes of movement, it is all in the same direction and entirely driven by the Iran/Israel war story.  Perhaps we are starting to see some pricing of a Fed rate cut, and if they do act in July, I would expect the dollar to fall, but right now, it feels much more like unwinding the war footing.

On the data front, aside from Chairman Powell at 10:00 this morning, we see Case Shiller Home Prices (exp +4.0%) and Consumer Confidence (100.0).  However, I suspect that neither of those will matter very much.  The equity market has the bit in its mouth and is looking for reasons to go higher.  Any dovish hints by Powell will set that off, as well as undermine the dollar.  We shall see.

Good luck

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Not Yet Foregone

Posted on by

The US has not yet been drawn
To war, though it’s not yet foregone
That won’t be the case
While Persians now brace
For busters of bunkers at dawn
 
But until such time as we learn
That outcome, the current concern
Is Jay and the Fed
And what will be said
At two o’clock when they adjourn

 

So, every top headline this morning discusses the idea that President Trump is considering whether to initiate US military action in Iran, specifically to drop the so-called bunker buster bombs to destroy Iran’s nuclear enrichment and bomb-making facilities.  There is certainly a lively discussion on both sides of the argument with the best description of the problem that I’ve seen being a poll showing that 74% approve Trump’s position that Iran must not get nuclear weapons, but 60% oppose US involvement in the war.  I’m glad I don’t have to thread that needle!

Obviously, there are market implications if the US does get involved but given the complete lack of clarity on the situation at this point, I do not believe I can add much to the discussion.  The only thing I will say is that the longer-term trends for both oil (lower) and metals (higher) are still intact, but we are likely to see some significant volatility along the way.

Which takes us to the next most important market discussion, the FOMC meeting that ends today and the potential market impacts.  It is universally assumed that there will be no policy change at the meeting, either interest rates or QT, which means that now the punditry is focused on the arcana of Fed policy.  As this is a quarter end meeting, the Fed will release its latest SEP (summary of economic projections) and dot plot, and with nothing else to discuss until the war in Iran either ends or intensifies, those are the key discussion points in the market.  

I have long maintained that one of the greatest blunders of the Bernanke era was the institution of forward guidance.  While it may have served its purpose initially, it has now become a major distraction.  Far too much attention is paid to the dot plot, where if one member adjusts their view by 25bps, it can impact markets which have built algorithms to respond to the median outcome.

Below is the March dot plot which showed a median “expectation” of Fed funds for the end of 2025 at 3.875%, or 50 basis points lower than the current level.  However, if two more FOMC members (out of 17) thought there was only going to be one cut, that would have shifted the median “expectation” as well as the narrative.

As such, the importance of the dot plot feels overstated compared to its actual value.  After all, no FOMC member has an impressive track record with respect to their analysis of the economy and its future outcomes, let alone what the appropriate rate structure should be at any given time.  In fact, nobody has that, which is the argument for restricting the Fed’s duties to be lender of last resort and allow markets to determine the proper level of interest rates based on the supply and demand of money.  But this is the world in which we live.  My one observation is that the post GFC era has greatly distorted views on the economy and appropriate monetary policy.  It is hard not to look at the below history of Fed funds and see the anomaly that occurred during the initial QE phase.  

Concluding, regardless of my, or anyone not on the FOMC’s, views on appropriate policy, it doesn’t matter one whit.  They are going to do what they deem appropriate, and while I don’t doubt their sincerity, I do doubt they have the tools for the mission.  Perhaps the most interesting thing that could come from this meeting is further information on their assessment of the current Fed process, including their communication policy.  I remain strongly in favor of them all shutting up and letting markets do their job although that seems unlikely.  But perhaps they will get rid of the dots which seem to have outlived any value they may have had initially.

Before we go to markets, I have to highlight one other market discussion this morning with Bloomberg publishing two different articles, here and here,  on the end of the dollar’s hegemony.  The first highlights a speech by PBOC governor Pan Gongsheng and his vision of a multicurrency world which, of course, includes the renminbi as a major part of the process.  I will believe that is a possibility as soon as China opens its capital accounts completely and allows flows into and out of the country with no restrictions.  (I’m not holding my breath.)  The second takes the Michael Bloomberg Trump hatred in the direction of the president is destroying the dollar’s reign because of his policies and to highlight the dollar has fallen 10% already this year!  But let us look at a long-term chart of the dollar, using the DXY as a proxy, and you tell me if you can see the recent move as being outsized in any sense of the word.  In fact, the dollar’s recent price action is indistinguishable from anywhere in its history, and it is not anywhere near to its historic lows.  In fact, it is just a few percent below its long-term average.

Ok, now let’s look at markets.  Yesterday’s selloff in equities seemed to be based on concerns over the escalation in Iran, but as that drags out, traders don’t know what to do.  They are certainly not pushing things much further.  In fact, overnight saw the Nikkei (+0.9%) have a solid gain although HK (-1.1%) followed the US lower.  Elsewhere in the region, South Korea and Taiwan performed well, while India and Indonesia lagged and the rest were +/-20bps or less.  Europe, though, is softer this morning with declines on the order of -0.4% on the continent across the board.  I think investors here are also waiting on the potential events in Iran.  But US futures are actually pointing slightly higher at this hour (7:30).

In the bond market, yields around the world are slipping with Treasuries falling -2bps and most of Europe seeing declines between -1bp and -3bps.  This is after a few basis point decline yesterday as well.  I guess the fear of too much US debt is in abeyance this morning.

In commodity markets, oil, which rallied sharply yesterday on fears of the US entering the war, is little changed on the day after that climb as while there has been lots of talk, oil continues to flow through the Strait of Hormuz, and everybody is pumping nonstop to take advantage of the current relatively high prices.  Gold is unchanged although the other metals (Ag +0.25%, Cu +0.7%, Pt +2.4%) continue to see significant support.  In fact, platinum this morning has broken above the top of an 11-year range and many now see an opportunity for a significant rally from here.

Finally, the dollar is somewhat softer this morning, slipping about 0.2% against the pound, euro and yen, with similar declines against most other currencies.  The exceptions to this are the KRW (+0.45%) which seems to be benefitting from a growing hope that a trade deal will be completed between the US and Korea shortly, and ZAR (-0.5%) as CPI data release there this morning shows inflation under control and no reason for SARB to consider tightening policy further.

On the data front, because of tomorrow’s Juneteenth holiday, we see Initial (exp 245K) and Continuing (1940K) Claims as well as Housing Starts (1.36M) and Building Permits (1.43M).  And of course, at 2:00 it’s the Fed.  My sense is absent a US escalation in Iran, it will be quiet until the Fed, and probably thereafter as well given the lack of reason for any policy changes.  After all, there is no certainty as to either war or trade policy right now, so why would they do anything.

If I had to opine, I would say the dollar is likely to decline over the next year, but that in the longer run, it will be firmer than today.  

Good luck

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Dine and Dash

Posted on by

The president left in a flash
Completing a quick dine and dash
But so far, no word
On what, this move, spurred
Though I’ve no doubt he’ll make a splash
 
Then last night the BOJ passed
On hiking, though none was forecast
And Germany’s ZEW
Implied there’s a view
That growth there will soon be amassed

 

I have to admit that when I awoke this morning, I expected there to have been significantly more news regarding the Iran/Israel conflict based on President Trump’s early departure from the G-7 meeting.  But, from what I see so far, while markets have reversed some of yesterday’s hope that a ceasefire was coming soon, my read is we are back to overall uncertainty in the situation.  Of course, the concept of the fog of war is well known, and I expect that we will not find out very much until those in control of the information, whether the IDF or the US military, or Iranian sources, choose to publicize things.  The one thing we know is that everything we learn will be biased toward the informants’ view, so needs to be parsed carefully.  I do think that Trump’s comments to the press when he was leaving the G-7 about seeking “an end. A real end. Not a ceasefire, an end,” to the ongoing activities is telling.  It appears the Israelis planned on a 2-week campaign and that is what they are going to complete.

From a market perspective, as we have already seen in the price of oil, and generally all asset classes, absent a significant escalation, something like a tactical nuclear strike by the Israelis to destroy the Iranian nuclear bomb-making capabilities, I expect choppiness on headlines, but no trend changes.  At some point, the fighting will end, and markets will return their focus to economic and fiscal concerns and perhaps central banks will become relevant again.

So, let’s turn to that type of news which leads with the BOJ leaving policy rates on hold, although they did reduce the amount of QE to ¥200 billion per month, STARTING IN APRIL 2026!  You read that correctly.  The BOJ, which has been buying ¥400 billion per month of JGBs while they raised interest rates in their alleged policy tightening, has decided that ten months from now it will be appropriate to slow the pace of QE.  Yes, inflation has been running above their 2.0% target for more than three years (April 2022 to be exact) as you can see in the below chart, but despite a whole lot of talk, action has been slow to materialize.

Source: tradingeconomics.com

You may recall about a month ago when Japanese long-end yields, the 30-year and 40-year bonds, jumped substantially, to new all-time highs and there was much discussion about how there had been a sea change in the situation in Japan.  Expectations grew that we would start to see Japanese institutions reduce their holdings of Treasuries and bring their funds home to invest in JGBs, leading to a collapse in the dollar.  The carry trade was going to end, and this was another chink in the primacy of the dollar’s hegemony.  Well, if that is the case, it is going to take longer than the punditry anticipated, at the very least, assuming it happens at all.  As you can see from the charts below of both USDJPY and the 40-year JGB, all that angst has at the very least, been set aside for now.

Source: tradingeconomics.com

Elsewhere, the German ZEW data released this morning was substantially stronger than both last month and the forecasts for an improvement.  As you can see from the chart below, it is back at levels that are consistent with actual economic growth, something Germany has been lacking for several years.  It appears that a combination of the continued tariff truce, the promises of massive borrowing and spending by Germany to rearm itself and the ECB’s easy policy have German business quite a bit more optimistic that just a few months ago.

Source: tradingeconomics.com

Ok, while we await the next shoe to drop in Iran or Israel, let’s see how markets have behaved overnight. Yesterday’s nice rally in the US was followed by a mixed picture in Asia with the Nikkei (+0.6%) gaining after the BOJ showed that tighter policy is not coming that soon.  Elsewhere in the region, China, HK and India were all down at the margin, less than 0.4% while Korea and Taiwan managed some gains with Taiwan’s 0.7% rise the biggest mover overall.  In Europe, though, the excitement about a truce in Iran is gone with bourses across the continent lower (DAX -1.25%, CAC -1.05%, IBEX -1.5%, FTSE 100 -0.5%).  Apparently, there is fading hope of trade deals between the US and Europe and concerns are starting to grow as to how that will impact European activity.  I guess the ZEW data didn’t do that much to help.  US futures at this hour (7:00) are all pointing lower by about -0.5%, largely unwinding yesterday’s gains.

In the bond market, Treasury yields, which backed up yesterday, are lower by -3bps this morning, essentially unwinding that move.  However, European sovereign yields have all edged higher between 1bp and 2bps with Italy’s BTPs the outlier at +3bps.  Quite frankly, it is hard to have an opinion as to why bond yields move such modest amounts, so I’m not going to try to explain things.

In the commodity space, fear is back in play as oil (+1.7%) is rallying as is gold (+0.4%) which is taking the rest of the metals complex (Ag +2.3%, Cu +0.3%, Pt +3.0%) with it.  These are the markets that are most directly responding to the ongoing ebbs and flows of the Iran/Israel situation, and I expect that will continue.  In the end, I continue to believe the long-term trend for oil is toward lower prices while for gold and metals it is toward higher prices, but on any given day, who knows.

Finally, the dollar doesn’t know which way to turn with modest gains and losses vs. different currencies in both G10 and EMG blocs.  The euro, pound and yen are all within 0.1% of yesterday’s closing levels while we have seen KRW (-0.4%) and INR (-0.3%) suffer and NOK (+0.4%) and SEK (+0.4%) both gain on the day.  However, those are the largest movers across the board, so it is difficult to make a case that anything of substance is ongoing.

On the data front, yesterday’s Empire State Manufacturing index was quite weak at -16, not a good look.  This morning, we see Retail Sales (exp -0.7%, +0.1% ex-autos), IP (0.1%), and Capacity Utilization (77.7%).  As well, the FOMC begins their meeting this morning with policy announcements and Powell’s press conference scheduled for tomorrow.  Helpfully, the Fed whisperer, Nick Timiraos, published an article this morning in the WSJ to explain why the Fed was going to do nothing as they consider inflation expectations despite the lack of empirical evidence that those have anything to do with future inflation.  But it is a really good sounding theory.

For now, the heat of the Iran/Israel situation will hold most trader’s attention, but I suspect that this will get tiresome sooner rather than later.  The biggest risk to markets, I think, is that the Iranian regime collapses and a secular regime arises, dramatically reducing risks in the Middle East and reducing the fear premium in oil substantially.  If that were to be the case, I expect the dollar would suffer as abundant, and cheap, oil would help other nations more than the US on a relative basis given the US already has its own supply.  But a major change of that nature would have many unpredictable outcomes.  In the meantime…

Good luck

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Quite Dreary

Posted on by

While pundits expected inflation
Would rise with Trump as the causation
The data has not
Shown prices are hot
Since tariffs joined the conversation
 
In fact, there’s a budding new theory
That’s made dollar bulls somewhat leery
If Powell cuts rates
While Christine, she waits
The dollar might soon look quite dreary

 

Well, it turns out measured inflation wasn’t quite as high as many had forecast, even if we ignore those whose views are completely political.  Yesterday’s readings of 0.1% for both headline and core were lower despite all the tariff anxiety.  The immediate response has been, just wait until next month, that’s when the tariff impact will kick in, you’ll see.  Maybe that will be the case, but right now, for a sober look, the Inflation_Guy™, Mike Ashton, offers a solid description of what happened and some thoughts about how things may be going forward.  Spoiler alert, tariffs are not likely the problem, let’s start thinking about money supply growth.

However, the market, as always, is seeking to create a narrative to drive things (or does the narrative follow the market?  Kind of a chicken and egg question) and there is a new one forming regarding the dollar.  Now, with inflation appearing to slow in the US, this is an opening for Chair Powell to cut rates again, despite the fact that inflation on every reading remains above their target.  Meanwhile, the uncertainty that US policy is having on economies elsewhere, notably in Europe as the tariff situation is not resolved, means Madame Lagarde is set to pause, (if not halt), ECB rate cuts for a while and voilà, we have the makings of a dollar bearish story.  

That seems likely to have been the driver of today’s move in the euro (+1.0%) which has taken the single currency back to its highest level since November 2021.

Source: tradingeconomics.com

Now, if you are President Trump and are seeking to reduce the trade deficit while bringing manufacturing capacity back to the US, this seems like a pretty big win.  Lower inflation and a lower dollar both work towards those goals.  Not surprisingly, the president immediately called for the Fed to cut rates by 100 basis points after the release.  As much as FOMC members seem to love the sound of their own voices, perhaps this is one time where they are happy to be in the quiet period as no response need be given!

At any rate, the softer inflation data has had a significant impact on the dollar writ large, with the greenback sliding against all its G10 counterparts, with SEK (+1.3%) leading the way, although CHF (+1.1%), NOK (+0.9%) and JPY (+0.8%) have also been quite strong.  However, the biggest winner was KRW (+1.3%) as not only has there been dollar weakness, but new president, Lee Jae-myung, has proposed tax cuts on dividends to help support Korean equity markets and that encouraged some inflows.  Other EMG currencies have gained as well, although those gains are more muted (CNY +0.3%, PLN +0.6%) and some have even slipped a bit (ZAR -0.5%, MXN -0.1%).  Net, however, the dollar is down.

Yesterday, I, and quite a few other analysts, were looking for more heat in the inflation story.  Clearly, if that is to come, it is a story for another day.  With this in mind, we shouldn’t be surprised that government bond yields have also fallen around the world with Treasuries (-5bps) showing the way for most of Europe (Bunds -6bps, OATs -5bps, Gilts -6bps) and even JGBs (-2bps) are in on the action.  

Earlier this week, the tone of commentary was that inflation was coming back, and a US stagflation was inevitable.  This morning, that narrative has disappeared.    Interestingly, I would have thought the combination of the cooler CPI and the trade truce between the US and China would have the bulls feeling a bit better.  Alas, the equity markets have not responded in that manner at all.  Despite the soft inflation readings, US equity markets yesterday edged lower, albeit not by very much.  But that weakness was followed in Asia (Nikkei -0.65%, Hang Seng -0.4%, CSI 300 -0.1%) with India, Taiwan and Australia all under pressure although Korea (+0.45%) bucked the trend on that dividend tax story.  And Europe, this morning, is also unhappy with the DAX (-1.1%) leading the way lower followed by the IBEX (-.9%) and CAC (-0.7%).  The FTSE 100 (-0.1%) is faring a bit better as, ironically, weaker than expected GDP data this morning (-0.3% in April) has reawakened hope that the BOE will get more aggressive cutting rates.  US futures are in the red as well this morning, -0.5% across the board.  Perhaps this is the beginning of the long-awaited decline from overbought levels.  Or perhaps, this is just a modest correction after a strong performance over the past two months.  After all, the bounce in the wake of the Liberation Day pause has been impressive.  A little selling cannot be a surprise.

Source: tradingeconomics.com

Lastly, we turn to commodities where the one consistency is that gold (+0.5%) has no shortage of demand, at least in Asia.  It seems that despite a 29% rise year-to-date in the barbarous relic, US investors are not that interested.  Those gains dwarf everything other than Bitcoin, and yet they have not caught the fancy of the individual investor in the US.  However, I believe that demand represents an important measure of the diminishing trust in the US dollar, at least for the time being.  The other metals are less interesting today.  As to oil (-1.9%), it has rallied despite alleged production increases from OPEC and weakening demand regarding economic activity.  Some part of this story doesn’t make any sense, although I don’t know which part yet.

This morning’s data brings Initial (exp 240K) and Continuing (1910K) Claims as well as PPI (0.2%, 2.6% Y/Y headline; 0.3%, 3.1% core).  While there are no Fed speakers, there is much prognostication as to how the CPI data is going to alter their DOT plot and SEP information next week at the Fed meeting.  

Finally, the situation in LA does not appear to have improved very much and it is spreading to other cities with substantial protests ostensibly planned for this weekend.  However, market participants have moved on as nothing there is going to change macroeconomic views, at least not yet.  If inflation is quiescent, the Fed doesn’t have to cut to have the tone of the conversation change.  That is what we are seeing this morning and this can continue quite easily.  When I altered my view on the strong dollar several months ago, I suggested a decline of 10% to 15% was quite viable.  Certainly, another 5% from here seems possible over the next several months absent a significant change in the inflation tone.

Good luck

Adf

PS – having grown up in the 60’s I was a huge Beach Boys fan and mourn, with so many others, the passing of Brian Wilson.  In fact, I wanted to write this morning’s rhyme as new lyrics to one of his songs, either “Fun, Fun, Fun” or “Surfin’ USA” two of my favorites.  But I realise that I have become too curmudgeonly as both of those are wonderfully upbeat and I just couldn’t get skeptical words to work.