Tag Archives: #trump

Never Sold

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The news of the day is that gold
Is actively bought, never sold
The Four Thousand level
Led some folks to revel
And drew many more to the fold
 
But weirdly, the dollar keeps rising
Which based on the past is surprising
The problems in France
And Sanae’s stance
Have been, for the buck, energizing

 

A month ago, many Wall Street analysts came out with forecasts that gold could trade as high as $4000/oz by mid 2026 as they reluctantly jumped on the bandwagon.  But, by many accounts, although my charts don’t show it, the barbarous relic’s futures contract traded a bit more than 120 lots at $4000.10 last night, nine months earlier than those forecasts.

Source: Bloomberg.com

Right now (6:20), the cash market is trading at $3957 (-0.1%) but there is absolutely no indication that the top is in.  Rather, I have been reading about the new GenZ BOLD investment strategy, which is buying a combination of Bitcoin and gold.  Mohammed El-Arian nicknamed this the debasement trade, which is a fair assessment and a number of banks have been jumping on this theme.

Perhaps more interesting than this story, which after all is simply rehashing the fact that gold is seen as a long-term hedge against inflation, is the fact that the dollar is trading higher alongside gold, which is typically not the case.  In fact, for the bulk of my career, gold was effectively just another currency to trade against the dollar, and when the dollar was weak, foreign currencies and gold would rise and vice versa.  But look at these next two charts from tradingeconomics.com, the first a longer term view of the relationship between gold and DXY and the second a much shorter-term view.

The one-year history:

Compared to the one-month history:

I believe it is fair to say that while there is a clear concern about, and flight from, fiat currencies, hence the strength of precious metals as well as bitcoin, in the fiat universe, the dollar remains the best of a bad lot.  Yesterday I described the problems in France and how the second largest nation in the Eurozone was leaderless while trying to cope with a significant spending problem amid broad-based political turmoil.  We have discussed the problems in Germany in the past, and early this morning, the fruits of their insane energy policies were shown by another decline in Factory Orders, this time -0.8%, far less than the 1.7% gain anticipated by economists.  I don’t know about you, but it is difficult for me to look at the below chart of the last three years of Germany’s Factory Orders and see a positive future.  Twenty-two of the thirty-six months were negative, arguably the driving force behind the fact that Germany’s economy has seen zero growth in that period.

Source: tradingeconomics.com

Meanwhile, the yen continues to weaken, pushing toward 151 now and quite frankly, showing limited reason to rebound anytime soon.  Takaichi-san appears to be on board with the “run it hot” thesis, looking for both monetary and fiscal stimulus to help Japan grow itself out of its problems.  The JGB market has sussed out there will be plenty more unfunded spending coming down the pike if she has her way as evidenced by the ongoing rise in the long end of the curve there.  While the 30-year bond did touch slight new highs yesterday, the 40-year is still a few basis points below its worst level (highest yield) seen back in mid-May as you can see in the chart below.  Regardless, the chart of JGB yields looks decidedly like the chart of gold!

Source: tradingeconomics.com

In a nutshell, there is no indication the fiscal/financial problems around the world have been addressed in any meaningful manner and the upshot is that more and more investors are seeking safety in assets that are not the responsibility of governments, but either private companies or have inherent intrinsic value.  This is the story we are going to see play out for a while yet in my view.

Ok, so, let’s look at how markets overall behaved in the overnight session.  China remains on holiday, but it will be interesting to see how things open there on Thursday morning local time.  Japan, was unchanged overnight, holding onto its extraordinary post-election gains.  As to the other bourses there, holidays abound with both Hong Kong and Korea closed last night and the rest of the region net doing very little.  Clearly the holiday spirit has infected all of Asia!  In Europe, though, we are seeing very modest gains across the board despite the weak German data.  The DAX (+0.2%) has managed a gain and we are seeing slightly better performance in France (+0.4%) and Spain (+0.4%) with the UK (+0.1%) lagging slightly.  On the one hand, these are pretty benign moves so probably don’t mean much, but it is surprising there are rallies here given the ongoing lousy data coming from Europe.  As to US futures, at this hour (7:20), they are all pointing higher by just 0.1%.

In the bond market, yields are continuing to edge higher with Treasuries (+2bps) leading the way and European sovereigns following along with yield there higher by between 2bps and 3bps.  There continues to be a disconnect between what appear to be government policies of “run it hot” and bond investors, at least at the 10-year maturity.  Either that or there is some surreptitious yield curve control ongoing to prevent some potentially really bad optics.

In the commodity markets, oil (+0.1%) is still firmly ensconced in its recent range with no signs of a breakout.  I read a remarkably interesting article from Doomberg (if you do not already get this, it is incredibly worthwhile) this morning describing the methods that the Mexican drug cartels have been heavily involved in the oil business in Mexico, siphoning billions of dollars from Pemex and funding themselves, and more importantly, how the US was now addressing this situation.  This is all of a piece with the administration’s view that the Americas are its key allies and its playground, and it will not tolerate the lawlessness that has heretofore been rampant.  It also implies that if successful, much more oil will be coming to market from Mexico, and you know what that means for prices.  As to the metals markets, they are taking a breather this morning with gold (-0.1%) and sliver (-0.3%) consolidating after yesterday’s rally.  We discussed gold above, but silver is about $1.50 from the big round number of $50/oz, something that I am confident will trade sooner rather than later.

Finally, the dollar is rallying again with the euro (-0.5%) and pound (-0.6%) both under pressure and dragging the rest of the G10 with them.  If the DXY is your favorite proxy, as you can see from the chart below, this is the 4th time since the failed breakout in late July that the index is testing 98.50 from below.  It seems there is some underlying demand, and I would not be surprised to see another test of 100 in the coming days.

Source: tradingeconomics.com

It should be no surprise that the CE4 currencies are all under pressure this morning and we have also seen weakness in MXN (-0.3%) and ZAR (-0.3%) although given the holidays in Asia, it is hard to make a claim there other than that INR (-0.1%) continues to steadily weaken and make new historic lows on a regular basis.

With the government shutdown continuing, there is still no official data although there is a story that President Trump is willing to have more talks with the Democrats.  We shall see.  I think the biggest problem for the Democrats in this situation is that according to many polls, nobody really cares about the shutdown, with only 6% registering any concern.  It is a Washington problem, not a national problem.  Of course, FOMC members will continue to speak regardless of the shutdown and today we hear from four more.  Interestingly, nothing any of them said yesterday was worthy of a headline in either the WSJ or Bloomberg which tells me that there is nothing coming from the Fed that matters.

Running it hot means that we will continue to see asset prices rise, bond prices suffer, and the dollar likely maintain its current level if not rally a bit.  We need a policy change somewhere to change that, and I don’t see any nation willing to make the changes necessary.  I have no idea how long this can continue, but as Keynes said, markets can remain irrational longer than you can remain solvent.  Be careful betting against this.

Good luck

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A Few Glitches

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Though stocks worldwide this year are higher
Investors have sought to inquire
If their dreams of riches
Might have a few glitches
And if they all sell, who’s the buyer?
 
Meanwhile, the key news of the day
Revolves around government pay
Will seven Dems buck
The warnings of Chuck
Or will the “resistance” hold sway?

 

Midnight tonight is the deadline for Congress to pass a continuing resolution to keep the government funded.  Democratic leaders, Representative Hakeem Jeffries and Senator Chuck Schumer, met with President Trump yesterday but came to no agreement.  The House has passed a clean CR, meaning it continues funding exactly as currently laid out, but the Senate needs 60 votes and Minority leader Schumer wants to increase spending by upwards of $1.5 trillion over the next 10 years to support the CR.  

Looking at the list of Senators, I count 9 democrats in states that President Trump won in the 2024 election and who may feel it is in their best interest to consider voting for the resolution than shutting down the government although history shows elected Democrats vote the party line regardless of the consequences.

I asked Grok what happens in a shutdown and reading through what occurs in each cabinet department, it will take several weeks, I believe, before anybody really notices.  The War Department and Homeland Security continue to function, so ICE agents are not going to disappear from the streets anytime soon.  Too, Social Security, Medicare and Medicaid are untouched.  I would argue those are the biggest issues.  The FBI and prisons remain active as does the FAA and TSA.  Maybe the biggest short-term issue is economic data will be delayed so there will be no NFP on Friday.  Given its recently demonstrated inaccuracies, that may be a benefit, although I’m sure that’s not the case.

Of course, the most important question is, will a government shutdown cause the stock market to decline, as we all know a rising stock market is the MOST important thing ongoing!  Thus far, it doesn’t appear investors are that worried, but perhaps that will change today.  After all, all the major US indices rallied yesterday although as of this morning (6:25) futures are pointing lower by about -0.1%.

But here’s the thing about stocks, no matter how much angst some folks have had, and how many calls for recession have been made, and how much people may hate President Trump, below is a table from tradingeconomics.com showing most major stock market indices and their performance YTD at the far right.  Take away Russia, which isn’t really major, and there is an awful lot of green!

Perhaps the proper question is, why has this been the case and can it continue?  Certainly, the fiscal underpinnings of almost every nation are deteriorating as debt grows rapidly alongside government spending while the prospects of repaying said debt diminishes.  So, the macroeconomic backdrop in many nations is shaky, at best (France, UK, US, Germany, Australia, Japan, to name a few).

Of course, any individual company will typically reflect the prospects of that company, the very fact that markets have rallied so strongly this year continues to support the rally.  Remember, there have been numerous recession calls, and even the Fed has begun to look at the employment situation as becoming a bigger issue than inflation, indicating they, too, are concerned over future economic growth prospects.  Hence, the widespread expectations for further rate cuts.  in fact, looking at the futures market, not only is it pricing two more cuts this year, but a further two more by September 2026, and then a long period of 3.0% Fed funds afterwards.

Thus, it appears the equity market is counting on rate cuts to support future earnings even though those rate cuts imply weaker economic activity which will undermine future earnings.  Quite the balancing act!  But then, I’m just an FX guy, so the intricacies of equities are clearly lost on me. 

Ok, you’ve already seen the overnight equity movement with Chinese shares the largest beneficiary of PMI data showing modest growth.  Combining that with the news of further stimulus yesterday and things in China look pretty good right now.

Turning to bonds, yields fell yesterday despite any noteworthy data.  Perhaps it was the Fed speakers who highlighted the need to ease policy further as their concerns grow over slowing employment.  At any rate, this morning, 10-year Treasury yields are unchanged at 4.14%, while a few bps above the lows seen last week, hardly demonstrating a major move higher.  European sovereign yields have edged higher by 1bp this morning across the board, also not really demonstrating much concern about things.  We did see some Eurozone data this morning with French inflation soft (1.2% Y/Y) while German Unemployment rose slightly and German state inflation data has generally been higher than last month.  The nationwide number is released at 8:00 this morning.  Meanwhile, Italian inflation was a bit softer than forecast (1.6%), so bond investors seem satisfied for now.

As has been the case for a while now, the biggest moves have come in the commodity space with oil (-0.7%) falling back to the middle of its trading range as per the below chart from tradingeconomics.com.

For whatever reason, the end of last week had oil bulls out in force, but they are an unhappy lot this morning.  Apparently, President trump and Israeli PM Netanyahu have agreed a Gaza peace plan, although the Palestinians were not privy to the details.  Perhaps peace there is reducing concerns in the oil market although I would have thought the Russia/Ukraine situation has a more direct impact.  As to metals, after another series of new highs across the precious space yesterday, this morning we are finally seeing a bit of profit taking (Au -0.7%, Ag -1.7%, Pt -2.8%, Cu -1.0%).  However, it is difficult to look at the chart and sense that this is over.

Source: tradingeconomics.com

Finally, the dollar is a touch softer this morning, essentially unchanged vs. the euro and pound although the yen (+0.4%) and Aussie (+0.4%) have both managed to rally.  The RBA met last night and left rates on hold, as expected, although their commentary afterwards had a hawkish tilt regarding the future of inflation which undermined equities and helped the currency.  As to the yen, their ‘Minutes’ were released and indicated there was growing support for a rate hike in October, although I will believe it when I see it.  But away from those two, there was virtually no movement and no news of note.

On the data front, I will lay out the alleged releases, although with the shutdown, the BLS and BEA ones will likely be delayed.

TodayCase Shiller Home Prices1.6%
 Chicago PMI43.0
 JOLTs Job Openings7.2M
 Consumer Confidence96.0
WednesdayADP Employment50K
 ISM Manufacturing49.0
 ISM Prices Paid63.2
ThursdayInitial Claims223K
 Continuing Claims1930K
 Factory Orders1.4%
 -ex Transport0.1%
FridayNonfarm Payrolls50K
 Private Payrolls60K
 Manufacturing Payrolls-7K
 Unemployment Rate4.3%
 Average Hourly Earnings0.3% (3.7% Y/Y)
 Average Weekly Hours34.2
 Participation Rate62.3%
 ISM Services51.7

Source: tradingeconomics.com

Today’s data will be released, and tomorrow’s is privately sourced, so shouldn’t be a problem, but come Thursday and Friday, that’s when things will go missing.  Ironically, the biggest impact will be on options traders who frequently place trades in anticipation of a data point, and with that data point missing, those premia are likely to diminish quickly.  Too, spare a moment for the algorithms who won’t have anything to trade against without data.  Poor programs 🤣.

History has shown the dollar tends to decline through government shutdowns, if they last any length of time (>3 or 4 days), so if we shut down and are still that way next week, I expect we could see some weakness.  But I’m sure there will be one more vote today to see if it will happen.  My take is a shutdown is in the cards but for how long, I have no idea.

Good luck

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Battlelines

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The battlelines are being drawn
On one side, the dollar is gone
‘Cause debt will explode
And once down that road
They claim folks would rather the yuan
 
But others are making the case
That dollar debt has much more space
To grow and expand
As it can withstand
More stress since it’s used everyplace
 
And finally, one thing left to note
Is Europe appears set to float
A digital euro
That ought to ensure-oh
The market, its price, will demote

 

Friday, I highlighted an idea which I had toyed with, but never explained eloquently, but that was done so by Michael Nicoletos (@mnicoletos on X).  While I offered a link to his work Friday, I know that many never click on links in notes like this, so I am copying his page showing this perspective.  It is clear, clean and asks the proper questions.

The reason I am doing this is because this weekend, I listened to a podcast with another very smart macro guy, Luke Gromen (@lukegromen) who has a very different take on the state of the world.  In short, Luke’s belief is that the US is already past the point of no return and that a potential downward spiral, caused by excessive US debt, is going to kick off soon.  The result is that we will see the dollar decline severely (as described by the DXY), gold, bitcoin, and equities rally, and that Treasury debt, especially long dated debt, will get killed.  In essence, he is explaining the inflation trade, higher US inflation will lead to those outcomes.

Let me start by saying, I agree with Luke on certain things, like the fact that we are likely to see higher inflation going forward as the government is in no mood to cut off the liquidity taps.  If you look at the below chart of M2 from the FRED database of the St Louis Fed, you can see that this measure has set a record high and risen 7.8% since its local nadir on October 30, 2023.

So, in a bit less than 2 years, it has grown about 8% after having shrunk that much in the prior 2 years during the first phases of the Fed’s QT program.  But now, despite the fact the Fed continues to slowly shrink their balance sheet, money supply is growing again, and my take is it will continue to do so for the foreseeable future as the government needs to essentially monetize the debt.  

Back to the argument, I believe that in this scenario of run it hot, gold and equities will do well while bonds will do poorly, but the question of the dollar on the FX markets is very different.  And this is where the Nicoletos’s theory comes into play.  If he is correct, and we adjust our idea about what constitutes excess leverage for the US, then expecting the dollar to fall in the FX markets may not be the best idea.  Rather, the news that the ECB is seeking to institute a digital euro, as per a speech by Madame Lagarde two weeks’ ago, and UK PM Starmer is claiming digital ID is necessary, to be followed by a digital pound, leads me to believe that institutions and individuals may decide they want more control over their own finances, rather than governments who have proven themselves exceptionally incompetent across numerous areas (energy, finance, and defense come to mind).  That implies that the dollar is likely to find a lot more support than those claiming it is set to collapse.

Again, I ask, will developing nations really want to keep their reserves in the CNY, or store their reserves of gold in Shanghai given the long history of capriciousness that the CCP has demonstrated.  People may hate the US; yet more people want to come here than go anyplace else because they have a higher degree of faith that their property will remain their property.  

This is not to say things are great, there are huge problems worldwide, just to say that my medium- and longer-term views are the dollar will be seen as TINA if other nations go down the road they are currently claiming they will follow.

The overnight narrative’s turned
To government shutdown concerns
As Trump and Dems meet
The word on the Street
Is too many bridges are burned

As to this morning’s market activity, the most noteworthy story is the question of whether the Senate will pass a continuing resolution (CR) to keep the government operating past midnight on Tuesday when the current spending authority runs out.  The House of Representatives have passed a ‘clean’ resolution which leaves the spending levels exactly where they are and lasts for 6 weeks allowing Congress time to pass the individual spending bills.  However, in the Senate, they need 60 votes to overcome the filibuster, and the Republicans only have 53 seats.  Minority Leader Schumer has promised to shut down the government unless he gets spending promises in the CR of upwards of $1 trillion over the next 10 years, and that feels unlikely.  Too, the House of Representatives is in recess, so no changes to their bill can be made on a timely basis.

My take is the Senate will cave in, but if not, they will not be able to withstand the pressure for very long as I believe that they will ultimately receive the blame for the outcome.  Turning to the market impact of this story, the most notable move overnight has been in precious metals where Gold (+1.3%), Silver (+1.8%) and platinum (+0.8%) are all continuing their recent runs and all at recent (and for gold all-time) highs.  However, it is difficult for me to understand this as a response to the potential shutdown in isolation.

Perhaps, if we turn to the dollar, which is lower, but only by -0.2% on the DXY, we can have a better understanding as at least it would make some sense that the dollar declines if the government does shut down.  And certainly, a weaker dollar manifests as stronger commodity prices, but the metals moves are so much larger, I have to believe there is another driver there.  Some talk focuses on the fact that Friday’s PCE data was not too hot thus keeping alive the hopes for further Fed rate cuts.  Personally, I lean toward the idea that the combination of concerns over increased military activity and the ensuing inflation are much more likely to be the drivers of precious metals’ rally.

Weirdly, despite concerns over inflation, bond yields are not responding in the manner one might expect as Treasuries are lower by -3bps and we are seeing similar moves throughout all the European sovereigns this morning.  As well, there was a very interesting article in the WSJ this morning about the fact that credit markets are incredibly strong, meaning the spread between corporate and Treasury yields has shrunk to the lowest levels on record for investment grade, and near that for junk bonds.  

To sum this up, bond markets are completely unconcerned with future inflation while precious metals markets are screaming inflation is coming soon.  Of course, one possible explanation for this seemingly divergent behavior is that the amount of liquidity that continues to be pumped into markets globally by central banks is driving fixed income investors to seek investments within their remits, i.e. bonds, while others are watching and trying to prepare for the inevitable.  In a funny way, the fixed income folks may be doing the right thing because if YCC comes into play, and I am almost certain it will, then yields will be lower still!

As to the rest of markets, equities are all about more liquidity as Friday’s US rally, which is continuing this morning with futures higher by 0.5% at this hour (7:15) demonstrates.  In Asia overnight, Japan (-0.7%) did not follow suit as a BOJ member hinted that a rate hike was coming at the October meeting, and we all know how much equities hate rate hikes.  But China (+1.5%) and HK (+1.9%) both rocked as word of a new government plan to inject CNY 500 billion into local governments to spur investment made the news.  Korea also benefitted from the combination of those things although India was unchanged and Taiwan (-1.7%) seemed to respond to a story that President Xi is seeking to get President Trump to agree that Taiwan is part of China.

As to Europe, the UK (+0.55%) is the leading gainer amid stories about pharma giants there raising prices, while continental markets are +/-0.2%, really not showing much life at all.

Oil (-1.8%) is slipping on news that Kurdish oil in the amount of up to 180K bbl/day is going to start flowing to the market again, adding to supply as OPEC is also talking of increasing production.  There was, however, an interesting article in the WSJ about the fact that Russian production is starting to turn down as 3 years of war and sanctions has reduced their capability of producing absent Western technology.

Finally, the dollar, as mentioned above, is a bit softer this morning with JPY (+0.4%) and NZD (+0.4%) the G10 leaders although the rest of the bloc has seen gains on the order of 0.1% or 0.2% only.  In the EMG bloc, KRW (+0.6%) is top dog with CNY (+0.2%) actually the next best performer.  So, overall, movement here has not been that impressive despite the narrative.

I’ve gone on far too long and as there is no front-line data today, I will post it tomorrow.  Of course, payrolls come Friday and be aware of five Fed speakers today and a total of ten this week.

Good luck

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Tariff Redux

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While many have called for stagflation
The ‘stag’ story’s lost its foundation
Q2 turned out great
With growth, three point eight
While ‘flation showed some dissipation
 
Meanwhile, Mr Trump’s on a roll
As he strives to still reach his goal
It’s tariff redux
On drugs and on trucks
While ‘conomists tally the toll

 

Analysts worldwide have decried President Trump’s policies as setting up to lead the US to stagflation with the result being the dollar would ultimately lose its status as the world’s reserve currency while the economy’s growth fades and prices rise.  “Everyone” knew that tariffs were the enemy of sane fiscal and trade policy and would slow growth leading to higher unemployment and inflation while the Fed would be forced to choose which issue to address.  In fact, when Q1 GDP was released at -05%, there was virtual glee from the analyst community as they were preening over how prescient they were.

But yesterday, we learned that things may not be as bad as widely hoped proclaimed by the analyst community after all.  Q2 GDP was revised up to +3.8% annualized growth, substantially higher than even the first estimate of 3.0% back in July.  Not only that, Durable Goods Orders rose 2.9% with the ex-Transport piece rising 0.4% while the BEA’s inflation calculations, also confusingly called PCE rose 2.1%.  Initial Claims rose only 218K, well below estimates and indicative that the labor market, while not hot, is not collapsing.  Finally, the Goods Trade Balance deficit was a less than expected -$85.5B, certainly not great, but moving in President Trump’s preferred direction.

In truth, that was a pretty strong set of economic data, better than expectations across the entire set of releases, and clearly not helping those trying to write the stagflation narrative.  Now, Trump is never one to sit around and so promptly imposed new tariffs on medicines, heavy trucks and kitchen cabinets to try to bring the manufacture of those items back into the US.  Whatever your opinion of Trump, you must admit he is consistent in seeking to achieve his goal of returning manufacturing prowess to the US.

Meanwhile, down in Atlanta, their GDPNow Q3 estimate is currently at 3.3%, certainly not indicating a slowing economy.  

In fact, if that pans out, it would be only the 14th time this century that there were two consecutive quarters of GDP growth of at least 3.3%, of which 4 of those were in the recovery from the Covid shutdown.

It would be very easy to make the case that the US economy seems to be doing pretty well, at least based on the data releases.  I recognize that there is a great deal of angst about, and I have highlighted the asynchronous nature of the economy lately, but what this is telling me is that things may be syncing up in a positive manner.

So, what does this mean for markets?  Perhaps the first place to look is the Fed funds futures market as so much stock continues to be put into the Fed’s next move.  Not surprisingly, earlier exuberance over further rate cuts has faded a bit, with the probability of an October cut slipping to 85%, down about 10 points in the wake of the data, and a total of less than 40bps now priced in for the rest of the year.  Recall, it was not that long ago that people were considering 100bps in the last three meetings of the year.

Source: cmegroup.com

The next place to look is at the foreign exchange markets, where the dollar’s demise has been widely forecast amid changing global politics with many pundits highlighting the idea that the BRICS nations would be moving their business away from dollars.  For a long time, I have highlighted that the dollar is currently within a few percent of its long-term average price, neither particularly strong nor weak, and that fears of a collapse were unwarranted.  However, I have also recognized that a dovish Fed could easily weaken the dollar for a period of time.  Short dollar positions remain large as the leveraged community continues to bet on that outcome, although I have to believe it is getting expensive given they are paying the points to maintain that view.

But if we look at how the dollar has performed over the past several sessions, using the DXY as our proxy, we can see that despite a very modest -0.1% decline overnight, it appears that the dollar may be breaking its medium-term trend line lower as per the chart below from tradingeconomics.com

Again, my point is that the idea that the US is facing a catastrophic outcome with a recession due and a collapsing dollar is just not supported by the data or the markets.  And here’s an interesting thought from a very smart guy, Mike Nicoletos (@mnicoletos on X) regarding some of the key drivers of the current orthodoxy regarding the dollar, notably the debt and deficit.  What if, given the dollar’s overwhelming importance to the world economy, we should be comparing those things to its global scale, not just the domestic scale.  If using that framework, as he describes here, the debt ratio falls to 58% and the budget deficit is down to 2.9%, much less worrying and perhaps why markets and analysts are out of sync.

Markets are going to go where they will, but having a solid framework as to how the economy impacts them is a very helpful tool when managing money and risk.  Perhaps this needs to be considered overall.

Ok, a really quick tour.  Yesterday was the third consecutive down day in the US, although all told, the decline has been less than -2%, so hardly devastating.  Asia mostly fell overnight as concerns over both tariffs and a Fed less likely to cut rates weighed on equities there with Japan (-0.9%), China (-1.0%) and HK (-1.35%) all under pressure.  The story was worse for other regional bourses with Korea (-2.5%), India (-0.9%) and Taiwan (-1.7%) indicative of the price action.

However, Europe has taken a different route with modest gains across the board (DAX +0.3%, CAC +0.45%, IBEX +0.6%) as investors seem to be looking through the tariff concerns.  US futures are also edging higher at this hour (7:45).

In the bond market, Treasury yields have slipped -1bp this morning, and while they remain above the levels seen immediately in the wake of the FOMC last week, they appear to be finding a home at current levels of 4.15% +/-.  European sovereigns are all seeing yields slip -3bps this morning as today’s story is focusing on how most developed nations are reducing the amount of long-dated paper they are selling to restrict supply and keep yields down.  This has been decried by many since then Treasury Secretary Yellen started this process, but as with most government actions, the expedience of the short-term benefit far outweighs the potential long-term consequences and so everybody jumps on board.

Turning to commodities, oil (-0.1%) is still trading below the top of its range and while it has traded bottom to top this week, there is no sign of a breakout yet.  I read yet another explanation yesterday as to why peak oil demand is going to be seen this year, or next year, or soon, which will drive prices lower.  While I do think prices eventually slide lower, I take the other side of that supply-demand idea and believe it will come from increased supply (Argentina, Guyana, Brazil, Alaska) rather than reduced demand.  In the metals markets, yesterday saw silver (-0.2%) jump nearly 3% to yet another new high for the move as traders set their sights on $50/oz.  Meanwhile gold (0.0%) continues to grind higher in a far less flashy manner than either silver or platinum (+10% this week) as regardless of my explanation of relative dollar strength vs. other fiat currencies, against stuff, all fiat remains under pressure.

And finally, the dollar after a nice rally yesterday, is consolidating this morning.  The currency I really want to watch is the yen, where CPI last night was released at 2.5%, lower than expected and which must be giving Ueda-san pause with respect to the next rate hike.  Most analysts are still convinced they will hike in October, but if inflation has stopped rising, will they?  I would not be surprised to see USDJPY head well above 150, a level it is fast approaching, over the next month.

On the data front, this morning’s BLS version of PCE (exp 0.3%, 2.7% Y/Y) and Core PCE (0.2%, 2.9% Y/Y) is released at 8:30 along with Personal Income (0.3%) and Personal Spending (0.5%).  Then at 10:00, Michigan Sentiment (55.4) is released and somehow, I have a feeling that could be better than forecast.  We hear from a bunch more Fed speakers as well although a pattern is emerging that indicates they are ready to cut again next month, at least until they see data that screams stop.

The world is not ending and in fact, may be doing just fine, at least economically. Meanwhile, the dollar is finding its legs so absent a spate of very weak data, I think we may see another 2% or so rebound in the greenback over the next several weeks.

Good luck and good weekend

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No Cash Left in the Fisc

Posted on by

Right now, markets keep taking risk
And lately, the pace has been brisk
But coming next week
We could see a peak
If there’s no cash left in the fisc
 
A government shutdown would raise
Concerns about ‘nomic malaise
As well, what I see
Is Trump’s OMB
Is planning a RIF anyways

 

Volatility remains absent from most markets these days, metals excepted, and given the dearth of data until tomorrow’s PCE report, the focus is beginning to turn elsewhere.  Perhaps the biggest story developing right now is the potential US government shutdown if no continuing resolution is passed by Congress.  The government’s fiscal year runs from October 1 through September 30, and the rules are if Congress hasn’t passed appropriations bills by the end of the fiscal year, nonessential services are ended, and government employees are furloughed until that process is completed.  As of right now, the House of Representatives has passed a clean bill, meaning it continues spending at the current rate, and we are all awaiting on the Senate.  However, the Senate needs 60 votes to pass it to overcome the filibuster and right now, the Democratic Minority Leader, Chuck Schumer, claims they will not support the bill.

First, understand this is not unprecedented.  In fact, according to Grok, it has happened 21 times since 1980 with the longest being 35 days in 2018-19 over funding for the border wall.  Now, I ask you, can anyone remember the impact of any of those shutdowns, which in fairness typically last less than a week?  

Next, it is worth understanding what actually happens during a shutdown.  National Parks are closed, while passport services, HUD services, SBA services, scientific research and EPA inspections are the type of things that are put on hold.  Also, the BLS will pause data collection and calculations, although given their recent track record, that may be seen as a benefit!  But things like Social Security, Medicare, Medicaid and the Military are all unaffected.

Naturally, there is a lot of politicking ongoing with this process and apparently, President Trump has given marching orders for departments to begin a RIF if the government is shut down.  So, when things reopen, there will be fewer federal employees, one of the goals of this administration, and something that is anathema to his opponents.

From a market perspective, the impact on equity markets during the December 2018 – January 2019 shutdown was actually a rally of just over 10%, although the market did decline in the month leading up to the shutdown.  My point is, there is a lot more politics than economics in this process.

But away from that story, commodities remain the market with the most interest as oil (-0.5%) continues to trade within the range I highlighted earlier this week with a top at $65.50, but has made a technical break above its 50-day moving average, which has the bulls starting to get excited.  As well, the backwardation of the curve is increasing, another bullish sign and much of this is being laid at the feet of President Trump’s seeming turn on the Russia/Ukraine war, where he is quite tired of President Putin’s dissembling.  Certainly, a break above that range top would be at least short term bullish for crude.

Source: tradingeconomics.com

As to the precious metals, while gold continues to trade well, silver has taken the mantle and as you can see from the chart below, is accelerating higher at an even more impressive clip than the yellow metal.  This is a common occurrence as silver historically outperforms gold, on a percentage basis, when both are in bull markets like this.  Just wait until it reaches $50/oz, and makes new all-time highs, and you will see even more discussion of the metals and why they are rallying with inflation concerns a major part of that discussion.

Source: tradingeconomics.com

Meanwhile, financial instruments are far less exciting lately with equity markets stabilizing after their recent run and bond markets also doing little.  Granted, we have seen two consecutive down days in US equity markets, but the magnitude of the decline was de minimis, so it is not really telling us very much.  European markets appear more closely linked to the US, with all bourses there lower by between -0.1% and -0.5% this morning although we did see some modest gains in Asia (China +0.6%, Japan +0.3%).  Net, it seems investors are not certain where to turn right now and are waiting for more clarity from the Fed as to whether more rate cuts are on the way.

The same is true of bond investors who apparently are unconcerned over the shutdown threats, with yields unchanged despite the increasingly combative rhetoric.  We did hear from SF Fed president Daly yesterday, a known dove, who explained that she is coming around to the idea that more cuts are necessary, and they were simply waiting to see how tariffs were going to impact things.  I might argue that she is anxious to cut rates but also doesn’t want to seem to support President Trump’s demands.

Finally, the dollar, after a pretty solid rally yesterday, is essentially unchanged this morning as well.  (That seems to be the theme today, no change.). As I look across my screen, the largest move I see is 0.15%, which is how far CHF has declined on the session, otherwise things have been completely dead.

On the data front, this morning brings the weekly Initial (exp 235K) and Continuing (1930K) Claims data as well as Durable Goods (-0.5%, 0.0% ex-Transport) and the final Q2 GDP reading (3.3%) all at 8:30 with Existing Home Sales (3.96M) at 10:00.  Yesterday saw New Home Sales rise dramatically more than expected at 800K although most analysts expect that number to be revised lower as the Census Bureau gets more information.  Nonetheless, it is a sign that the economy is not collapsing, that’s for sure.  

We also hear from four more Fed speakers today, Williams, Bowman, Barr and Daly again, and we will need to see how they all interpret the current situation.  We learned from the dot plot that there are a lot of different opinions at the Fed right now, and personally, I am very glad to see that.  Given the overall confusion, and the asynchronous nature of the economy right now, it would be more concerning if everyone was on the same page.

As far as the shutdown is concerned, you can be sure that this process will continue until next Tuesday night, at the earliest, if the Democrats cave, and if not, we will then be bombarded by both sides claiming it is the other side’s fault.  Eventually a spending bill will be passed, and as we saw back in 2019, markets pretty much look through this stuff.  Meanwhile, unless the data starts to really deteriorate and brings Fed comments along for that ride, I think the dollar is probably in a rough equilibrium space for now.

Good luck

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Throw in the Towel

Posted on by

All eyes are on Chairman Jay Powell
And if he will throw in the towel
Or will he still fight
Inflation? Oh, right
He caved as the hawks all cried foul!
 
So, twenty-five’s baked in the cake
While fifty would be a mistake
If fighting inflation
Is his obligation
Though half may, Trump’s thirst, somewhat slake

 

Well, it’s Frabjous Fed Day and there will be a great deal of commentary on what may happen and what it all means.  Of course, none of us really knows at this point, but I assure you by this afternoon, almost all pundits will explain they had it right.  

At any rate, my take is as follows, FWIW.  I believe the huge revision to NFP data has got the FOMC quite concerned.  Prior to that, they were smug in their contention that patience was a virtue and their caution because of the uncertain price impact of tariffs was warranted given the underlying strength in the jobs market.  Now, not only has that underlying strength been shown to be a mirage, but the import price data released yesterday, showing that Y/Y, import prices are flat, is further evidence that tariffs have not been a significant driver of inflation.  If you look at the chart below of Y/Y import prices for the past 5 years, you can see that since April’s ‘Liberation Day’ tariff announcements, they have not risen at all.

Source: tradingeconomics.com

With that in mind, if you are the Fed, and you are data dependent, as they claim to be, and the data shows weakening employment and stable prices in the area you had been highlighting, you have no choice but to cut.  The question then becomes, 25bps or 50bps?  While the market is pricing just a 6% probability of a 50bp cut, given there are almost certainly three Governor votes for 50bps (Waller, Bowman and Miran) and the underlying central bank tendency is toward dovishness, I am going to go out on a limb and call for 50bps.  Powell and the Fed have already been proven wrong, and the only thing worse for them than seeming to cave to pressure from the White House would be standing pat and being blamed for causing a recession.  

With that in mind, my prognostications for market responses are as follows:

  • The dollar will weaken pretty much across the board with a move as much as -1% possible
  • Precious metals will rally sharply, making new highs for the move as this will be proof positive that the Fed has tacitly raised its inflation target from the previous 2%.  In fact, my take is 3% is the new 2%, at least until we spend a long time at 4%.
  • Equity markets will take the news well, at least initially, as the algos will be programmed to buy, but the concern will have to grow that slowing economic activity will impair earnings going forward, and multiples will suffer with higher inflation.  I continue to fear a correction here.
  • Bonds are tricky here as they have been rallying aggressively for the past six weeks and that could well have been ‘buying the rumor’ ahead of the meeting.  So, it is not hard to make the case that bonds sell off, and long end yields rise in response to 50bps.

On the other hand, if they cut 25bps, and sound hawkish in the statement or Powell’s presser, I don’t imagine there will be much movement of note.   I guess we’ll see in a while.

Until then, let’s look at the overnight price action.  Yesterday’s modest declines in US equities looked far more like consolidation after strong runs higher than like the beginning of the end.  The follow on in Asia was mixed with Tokyo (-0.25%) after export data was weak, especially in the auto sector, while HK (+1.8%) and China (+0.6%) both rallied on the prospect of reduced trade tensions between the US and China based on the upcoming meeting between Presidents Trump and Xi.  Elsewhere in the region, Korea, Taiwan and Australia fell while India, Malaysia and Indonesia all rallied, the latter on the back of a surprise 25bp rate cut by Bank Indonesia.

In Europe, the picture is also mixed with Germany (-0.2%), France (-0.4%) and Italy (-1.2%) all under pressure, with Italy noticeably feeling the pain of potential domestic moves that will hurt bank profitability with increased taxes there to offset tax cuts for individuals.  Spain is flat and the UK (+0.25%) slightly firmer after inflation data there showed 3.8% Y/Y headline, and 3.6% Y/Y core, as expected and still far higher than the BOE’s 2.0% target.  While the BOE meets tomorrow, and no policy change is expected, if the Fed cuts 50bps, do not be surprised to see 25bps from the Old Lady.  US futures at this hour (7:30) are essentially unchanged.

In the bond market, Treasury yields continue to creep lower ahead of the meeting, slipping another 2bps this morning and now trading at 4.01%, the lowest level since Liberation Day and the initial fears of economic disaster in the US.

Source: tradingeconomics.com

You can see the trend for the past six months remains lower and appears to be accelerating right now. Meanwhile, as is often the case, European sovereign yields are following Treasury yields and they are lower by between -1bp and -2bps across the board.  Nothing to see here.

Commodity markets have seen the most movement overnight with oil (-0.7%) topping a bit while gold (-0.65%), silver (-2.5%) and copper (-1.8%) have all seen some profit taking ahead of the FOMC meeting.  Now, there are plenty of profits to take given the 10% rallies we have seen in gold and silver in the past month.  In fact, I lightened up some of my gold position yesterday as well!

Finally, the dollar, which fell pretty sharply yesterday is bouncing a bit this morning.  Using the DXY as proxy, it came close to the lows seen back on July 1st, as you can see in the chart below. 

Source: tradingeconomics.com

But remember, as you step away from the day-to-day, the dollar is hardly weak.  Rather, it is much closer to the middle of its long-term price action as evidenced by the longer view below.

Source: finance.yahoo.com

There is a lot of discussion on FinX (nee FinTwit) about whether we are about to bounce or if the dollar is going to collapse.  But it is hard to look at the chart directly above and get the feeling that things are out of hand in either direction.  Now, relative to some other currencies, there are trends in place that don’t impact the DXY, but matter.  Notably, CNY and MXN have both been strengthening slowly for the bulk of the year and are now at levels not seen for several years.  given the importance of both these nations with respect to trade with the US, this is where Mr Trump must be happiest as it clearly is weighing on their export statistics.

Source: tradingeconomics.com

Ahead of the FOMC meeting, we do get a few data points, with Housing Starts (exp 1.37M) and Building Permits (1.37M) leading off at 8:30.  Then at 9:45 the BOC interest rate decision comes, with a 25bp cut expected and finally the Fed at 2:00.  Housing will not have any impact on the market in my view but the BOC, if they surprise, could matter, especially if they pre-emptively cut 50bps as that will get the juices flowing for the Fed to follow suit.  But otherwise, we will have to wait for Powell and friends for the next steps.

Good luck

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More Drear

Posted on by

While many, last night, were dismayed
By Jensens’s results as displayed
Most markets worldwide
Absorbed them in stride
As buyers keep up their crusade
 
Meanwhile, Europeans still fear
That things won’t get better this year
The war in Ukraine
Is at it again
While sentiment points to more drear

 

Please understand, I only write about Nvidia because it is topic number one in the markets overall, albeit not very important in FX for now.  So, briefly, despite record revenues and earnings, the numbers were slightly below expectations, and the immediate result was for the share price to decline about 3% or so.  As I type this morning, though, it has already begun to recoup some of those losses and while there are many commentators claiming this was a disaster and forecasts are unrealistic, my sense is the company is going to continue to churn out chips and profits.  I read that their gross margins are 72%, a remarkably high number.  In the end, it is hard for me to look at these results and think the end is nigh.  So, let’s move on.

A moment, first, to remember the tragedy in Minneapolis where two children were killed in a church shooting on the first day of school there as well as the increase in hostilities in Ukraine where last night Russia launched a massive aerial attack on Kyiv, sending 629 missiles and drones of which 40 got through and 14 were killed along with 38 injured.  At this time, it certainly doesn’t look like hostilities in Ukraine are about to end and I think it is fair to say that the only one seeking that result is President Trump.  Clearly Putin is determined to conquer Ukraine, clearly Zelenskiy is determined to resist and apparently the entire EU wants to continue the fight regardless of the costs.

My sense is the problem for Europe is that it is a theoretical construct, not a nation.  As such, it cannot make decisions on a timely basis as a group.  So, while some want to rearm and fight, others are reluctant to do so and would rather free ride.  This lack of cohesion makes the EU a very unstable partner and will hinder their efforts to do more than continue to shovel money to Zelenskiy and Ukraine.  The war has been ongoing for more than three years and I have become of the opinion that it will not end until one side runs out of resources.  Ukraine’s attacks on Russia’s oil infrastructure are starting to have an impact, but it remains to be seen if they can keep those up while Russia continues to bombard population centers.

With that as backdrop, perhaps we should not be surprised that the data released this morning from the Eurozone showed Confidence and Sentiment indicators for both businesses and consumers falling compared to last month and relative to expectations.  Looking at the data from tradingeconomics.com, you can see that the August results were worse for everything with confidence falling but concerns over inflation rising.

                                                                                                             Actual          Previous            Estimate

While these numbers are not devastating in themselves, the trend is not positive.  Selecting just one, Consumer Confidence in this case, you can see that while not the worst it has been over the past 5 years (the initial invasion of Ukraine marked the nadir), the trend is not very friendly.  And pretty much all the charts are the same, not the worst but trending the wrong way.

Source: tradingeconomics.com

I make these points because I continue to read about negative sentiment regarding US assets and the dollar, and yet I cannot help but look at the Eurozone and see a negative situation.  I agree that if the Fed starts to get aggressive cutting rates, which seems unlikely as long as Powell remains Chair, the dollar will fall, but is Europe really where you want to be?  I’m not convinced.

Away from that, not much else has been happening (it is the last week of August, and it appears almost everyone is on holiday) so let’s look at overnight price action.  Leading up to the Nvidia earnings, equities in the US rallied, and despite the Nvidia disappointment, futures are currently (7:15) unchanged across the board.  Last night in Asia, China (+1.8%) was the leader, reversing yesterday’s declines with the talk of the town still AI and China’s new AI Plus strategy.  Meanwhile, the Hang Seng (-0.8%) disagreed with the mainland although there was no separate news.  Tokyo (+0.7%) was solid, but elsewhere in the region there were more laggards (India, Taiwan, Philippines) than winners (Korea, Australia) with the winners just barely so.

With that Eurozone data, you will not be surprised that European shares are generally softer, with the major bourses lower by between -0.2% and -0.4% and only the CAC (+0.1%) bucking the trend.  Perhaps this is because the French FinMin, Eric Lombard, claimed France would be able to pay its bills although it seems clear the current government is going to fall when the confidence vote is held on September 8th.

In the bond market, 10-year Treasury yields are unchanged this morning and edging toward the lower end of their recent trading range, with no indication that there is a funding problem for the US.  However, it is worth noting that the yield curve is steepening in the US (and everywhere else) as the 2yr-30yr spread is now 128bps and as you can see from the chart below, that spread has been widening all since July. (30yr yields are in green and the LHS Y-axis).

Source: tradingeconomics.com

When the yield curve inverted back in 2020, there was much talk of its prowess as a prognosticator of coming recessions.  However, we are still awaiting that recession.  In fact, I believe history shows it is when the curve steepens sharply that more problems occur.  It is easy to look at this and see the market is expecting inflation to continue to rise especially given the Fed seems to have put inflation in the back seat of their mandate.  Beware!

In commodities, oil (-0.1%) is stabilizing after a solid rally yesterday as the EIA data was a somewhat larger draw on inventories than expected and perhaps Ukraine’s recent successes regarding attacks on Russian oil infrastructure has some folks concerned.  However, as my friend JJ who writes Market Vibes notes, open interest is declining fast, and activity remains very slow in the space.  At the same time, gold (+0.3%) rallied all day yesterday and is continuing this morning and dragging silver (+1.1%) along for the ride.  Spot gold is back above $3400/oz, a level that had seemed toppish for quite a while.  Perhaps this is the long-awaited break higher the gold bugs have been talking about, but I think we need to see another $100/oz to make that commitment and that likely would entail a much weaker dollar, something that has not yet been happening.

Turning to the dollar, while it is a touch softer this morning, -0.3% as per the DXY, if you look at the chart below (which resembles so many charts these days) since the post-Liberation Day volatility, it is hard to get excited about a move in either direction.  We will need a new out of the box catalyst and I just don’t know what that will be.

Source: tradingeconomics.com

While the dollar’s weakness this morning is universal, the biggest mover overnight was KRW (+0.6%) which rallied after BOK governor Rhee defended their intervention, even indicating it is part of the trade deal with the US.  Otherwise, 0.1% to 0.3% describes the entire slate of currency gains vs. the greenback.

We get some real data this morning as follows: Initial (exp 230K) and Continuing (1970K) Claims; Q2 GDP (3.1%); Q2 Real Consumer Spending (1.4%); and Q2 GDP Sales (6.3%), although this is the second look at all these numbers.  Tomorrow’s Personal Income and Spending as well as PCE data will be far more interesting.  We hear from Governor Waller as well, but we already know his views are to cut right away.

It is difficult to get too excited about much these days and there are valid arguments for movement in most markets in both directions (remember the idea that the goods and services economies are out of sync).  Net, until it is clear the Fed is going to cut aggressively, assuming that happens, the dollar is likely to drift.

Good luck

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The Zeitgeist Could Shatter

Posted on by

While crime throughout DC has dropped
And Trump’s Fed demands haven’t stopped
The story today
That really holds sway
Is whether Nvidia’s topped
 
The war in Ukraine doesn’t matter
Nor does if the yield curve is flatter
‘Cause stonks must go higher
And that does require
Good news, or the zeitgeist could shatter

 

Some mornings things just are not that interesting in markets despite the ongoing events happening around the world.  Arguably, the biggest headlines revolve around the remarkable decline in crime in Washington DC, which while most of the mainstream media decried the President’s actions at first, has grown in popularity, even amongst his foes.  From a market perspective, the number of stories and editorials written about President Trump’s efforts to fire Fed governor Lisa Cook has risen exponentially, with many still trying to explain the Fed will lose its independence if Trump is successful.  (Given they have not been independent since 1987, I would take this with a grain of salt).  The other noteworthy story is that the EU is going to fast-track legislation to remove all tariffs throughout the EU on US industrial good imports, one of the results of the trade negotiations.

But, while those may be of passing interest, the thing in markets that really has tongues wagging is the fact that Nvidia is set to release their Q2 earnings this afternoon after the equity markets in the US close.  I must admit, thinking back to the tech bubble in 2000-01, I do not remember any single company garnering the amount of attention that Nvidia gets these days.  Perhaps Cisco Systems is the closest analogy, but it was nowhere near this level of interest and excitement.  While this is an imperfect analysis, I think it is worth looking at the charts of both Nvidia and Cisco (from finance.yahoo.com) to help you see the magnitude of the rise in each case.  It is certainly not hard to draw the conclusion that Nvidia may be peaking.  After all, if it declines by 75%, it will still have a market cap > $1 trillion!

NVDA

CSCO

I think it is reasonable to ask whether AI is a bubble.  I also think it is reasonable to ask whether the so-called hyperscalers, Meta, Microsoft, Alphabet and Amazon, are spending too much on building out their AI platforms.  This would be the case if the promised revenues never materialize.  Certainly, other than for Nvidia, those revenues are paltry at best so far.  But these are all observations from a poet who doesn’t follow the stock closely and simply cannot avoid some of the story because it is so prevalent everywhere.  FWIW, which is probably not very much, my take is that history has shown that new innovations, e.g. the automobile, electricity, the internet, can have remarkably wide-ranging implications but usually take far longer to achieve those ends than equity investors assume.  In other words, the idea that the megacap companies are overvalued seems pretty compelling.

Enough of my amateur equity analysis, and I’m sorry, but that is all that seems to be of interest today.  So, let’s look at how markets have behaved overnight ahead of the news this afternoon.  After modest afternoon rallies resulted in higher closes in the US yesterday, Japan (+0.3%) followed suit as did Australia (+0.3%), but both China (-1.5%) and Hong Kong (-1.3%) fell sharply, reversing some of their recent gains as Chinese industrial profits fell -1.7%, a worse than expected outcome, and it seemed to have triggered some profit taking.  With that in mind, I have read a number of analysts who have become of the opinion that Chinese equities are setting up for a much larger move higher based on additional stimulus as well as the fact that Chinese interest rates are the lowest in the world right now (ex-Switzerland).  Elsewhere in the region, India (-1.0%) lagged alongside China and most of the others had much less movement in either direction.

In Europe, the picture is mixed with the CAC (+0.4%) the leading gainer which looks very much like a reaction to the past two sessions’ sharp declines.  Spain (-0.4%) is lagging, although there is no particular news, and Germany (-0.15%) is also softer after the GfK Consumer Confidence report was released at a weaker than expected -23.6.  As to US futures, at this hour (7:25) they are ever so slightly higher.

In the bond market, despite all the anxiety over the Fed and Trump’s attempt to remove Governor Cook, 10-year yields are higher by 1bp after falling 3bps yesterday.  European sovereign yields are lower by -1bp across the board and JGB yields are unchanged.  In other words, while the media’s hair is on fire, clearly the market’s is not.

In the commodity space, oil (-0.1%) is little changed this morning, maintaining yesterday’s declines which appear to have been a result of Russia seeking to export more crude after Ukrainian attacks on Russian refineries have slowed output.  Gold (-0.6%) which saw a strong rally yesterday is falling back a bit, but remains in that tight range I showed yesterday, although both silver (-0.9%) and copper (-1.3%) are under more pressure this morning, likely on the back of a stronger dollar.

Speaking of the dollar, it is firmer across the board this morning, rising 0.5% vs. the euro, yen and Aussie, with slightly smaller gains vs. the other G10 currencies.  In emerging markets, ZAR (-0.85%) is the laggard, not surprisingly on the back of weaker precious metals prices, but PLN (-0.75%) is also under pressure on a combination of the weak euro and concerns over the lack of progress in the Russia/Ukraine war.  Even CNY (-0.15%) is weaker despite a renewed belief that China is going to allow the yuan to strengthen as part of any trade deal.

There is no front-line data to be released today, with only EIA oil inventories expecting a modest net draw.  Richmond Fed president Barking speaks at 12:45 but given he just explained his views yesterday, that he didn’t foresee much change in rates at all given the current state of the economy, I cannot imagine he will have changed that view.

And that’s all we have today.  I anticipate a lackluster session in all markets as traders await the Nvidia numbers later.  Of course, President Trump could surprise us all with an announcement on Russia, the Fed, or any of a number of other situations, but those are outside my ability to anticipate.  The market is still pricing an 87% chance of a September cut and an 80% chance of two cuts by December.  If the Fed gets aggressive, for whatever reason, the dollar will suffer.  But that is not yet the case, so range trading seems the best bet.

Good luck

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Political War

Posted on by

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

Posted on by

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

Adf

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.