Tag Archives: #war

Not Be Sublime

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Investors are starting to shun
The riskiest things one-by-one
So, stocks feel the pain
And bonds, too, feel strain
The dollar, though’s, on quite a run

It’s nearly two weeks since this started
And so far, no ending’s been charted
The impact o’er time
Will not be sublime
Thus, trading’s not for the faint-hearted

Another day and there is no end in sight for the ongoing military action in Iran.  US strikes continue apace and Iranian retaliation also continues, albeit at a lesser rate it seems.  However, the information from the war zone remains difficult to trust as all of it is spun for various audiences with no sense of objective truth.  As such, it is difficult to have an opinion on how long this will continue.

With that in mind, all we can do is observe market behavior and see what we can glean.  Starting with equity markets around the world, the below screenshot from Bloomberg.com this morning shows that risk is clearly off, although not catastrophically so, at least not yet.

So, weakness in the US yesterday was followed by weakness overnight in the major markets in Asia as well as in other regional markets (Korea -1.7%, India -1.9%, Indonesia -3.1%) with the rest having declined by lesser amounts.  It is important to see that all the Asian markets (and European and US markets) have fallen in the past month, but remain higher, in some cases substantially so, since this time last year.  The point is that this move can still rightly be considered corrective, rather than a dramatic change in opinion.

European bourses are demonstrating similar behavior although US futures at this hour (6:45) are slightly higher, about +0.15% across the board.  Thinking about equity markets overall, one of the main features of the US market was that it maintained a relatively high P/E ratio, no matter whether measured on a forward looking or historical basis.  Thus, a correction in equity prices, even absent the war, would not have been that surprising.  The same could not be said about European or Asian markets, which trade at much lower valuations, but then, in Europe especially, prospects for growth remain hampered by individual national domestic policies along with EU wide policies, notably in the energy sector.    Under the rubric a picture is worth 1000 words, it is not hard to understand why US equity markets dominate global markets.

Source: tradingeconomics.com

Germany has averaged -0.3% GDP growth over the past 3 years, and the EU is just above it at +0.4%.  Meanwhile, this morning’s UK GDP data showed weaker than expected outcomes, with Y/Y of 0.8% after a stagnant January.  Are US markets richly priced?  Sure, but what prospects do you have elsewhere?

Turning to bond markets, the traditional safe haven appeal of bonds, especially Treasuries and Bunds, is MIA.  While this morning, Treasuries (-1bp) and most European sovereigns (-1bp across the board) have seen prices stop declining, the picture over the past two weeks has not been encouraging.  The chart below shows the price action in both Treasuries and Bunds and, as you can see, both have seen yields rise sharply since the beginning of the month/war.  Given the ongoing stress in oil markets, and the implications that has for inflation worldwide going forward, it should not be a surprise that bonds don’t appear to offer their ordinary haven characteristics.

Source: tradingeconomics.com

The big question here, and around the world truthfully, is how will central banks respond to the rise in energy prices and subsequent rise in headline inflation?  If they try to address price pressures by raising rates in this scenario, it will almost certainly lead to recessions everywhere.  But will their models allow them to hold their policies if inflation starts to rise sharply?  It’s funny, I have been remarking how central bank policies have lost their luster recently, having been overwhelmed by fiscal policies, but suddenly, monetary policy is back in the limelight.  We shall see how they perform.

In the commodity markets, WTI (-1.3%) rallied sharply yesterday but is giving back a bit this morning.  The big headline yesterday was that Brent crude closed above $100/bbl for the first time since 2022 in the wake of Russia’s invasion into Ukraine.  Of course, that was more about the big, round number feature, than the percentage rise.  After all, is there really a difference of $98/bbl or $100/bbl in the broad scheme of things?  Oil continues to be THE driving factor in all markets right now and that is not likely to change anytime soon.  As long as the Strait remains closed to traffic, this pressure will continue to build. 

In the metals markets, both gold and silver continue to consolidate around their recent levels ($5100 in gold, $85 in silver) and it appears we are going to need another catalyst of note to get that to change.  I see no change in supply metrics, that’s for sure, but if there is a recession, silver demand may well be reduced given its industrial uses.

Finally, the dollar is king of all it surveys, at least in the FX markets.  The euro is below 1.15 (it seems like only last week that pundits were talking about the consequences of the euro trading above 1.25.  The DXY has broken above 100, although we will need to see an extension of this move to be convinced that it is going to head much higher, and USDJPY is now pushing near 160 again, which brought out comments from Katayma-san, the Japanese FinMin, about closely monitoring the yen’s value.  Of course, given the broad-based rise in the dollar, the current yen weakness cannot be seen as that troubling.

But what is a bit more interesting to me, and more definitive proof that the dollar is not about to collapse, is the coincident moves higher in the dollar vs. a number of other currencies.  Look at the chart below of ZAR (-0.15%), SEK (-0.3%) and MXN (0.0%).  Each demonstrates virtually identical trade patterns, and all of them reached their respective peaks (dollar’s nadir) on January 29th.  You may recall that was the day president Trump named Kevin Warsh as the next Fed Chair, and we saw a major reversal in stocks, gold, silver and other markets.  

Source: tradingeconomics.com

My best estimate is that FX markets are pricing in a tighter Fed at this point, which. Based on Fed funds futures, showing just one cut potentially this year in December, makes a lot of sense.  I guess it remains to be seen how other central banks will respond to the ructions in markets caused by the war, but this is the first order consequence.

Source: cmegroup.com

Turning to this morning’s data, we see a bunch as follows: 

Q4 GDP (2nd estimate)1.4%
Personal Income0.5%
Personal Spending0.3%
Durable Goods1.2%
-ex Transport0.5%
PCE0.3% (2.9% Y/Y)
Cpore PCE0.4% (3.1% Y/Y)
JOLTs Job Openings6.7M
Michigan Sentiment55.0

Source: tradingeconomics.com

As with Wednesday’s CPI data, the PCE data does not include the war, so will be dismissed.  My take is the Income and Spending numbers, and the JOLTs number will be the most impactful if they are a long way from estimates.  

And that’s where we stand.  Markets are still unsure of what to believe regarding the war, and when it comes to war, things happen that are unexpected all the time, the so-called unknown unknowns.  In the end, it is hard to bet against the dollar for right now, but that could change in an instant based on the next headline.

Good luck and good weekend

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Impacts of War

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The financial impacts of war
Are many, and so here are four
Inflation will rise
And what this implies
Investors, most bonds, will abhor

The dollar is like to remain
Demanded and that will cause pain
For stocks everywhere
But one thing will fare
Just fine, look for gold, more, to gain

Obviously, the war in Iran remains the top story and is likely to remain so for a few more weeks at least.  Arguably, the only way this will change is either a regime change takes place and talks for peace begin, or Iran is able to retaliate in a heretofore unknown fashion sufficient to force the US and Israel to withdraw.  President Trump has indicated he believes this campaign will last 4-5 weeks with that regime change the result.  But remember, the Russia/Ukraine war slipped from the headlines after 6-8 weeks, and it is still ongoing.  In fact, I challenge you to find a story about that war anywhere these days.

My point is, despite the ongoing hostilities, the rest of the world continues on its way, albeit with some new bumps in the road.  Clearly, the biggest bump remains the price of oil and, for much of Europe and Asia, its continued availability.  While the price of oil (+0.1% today) has risen about 18% in the past month, a look at the long-term chart below offers a bit more perspective as to just how limited this movement has been so far.

Source: tradingeconomics.com

I have highlighted the week of the Russian invasion from February 2022, which saw oil rise more than 20% at the time and remain elevated for about 5 months before it retraced to prewar levels.  The reaction this time has not been nearly as dramatic even though the effective closure of the Strait of Hormuz has removed about 20% of global oil supply from the market right now, as well as a similar proportion of LNG.  This is why we have seen the massive spike in European and Asian LNG prices as that was the destination of those cargoes.  Ironically, one of the most negatively impacted nations is China, which was Iran’s biggest oil customer, but now has seen a dramatic decline in the availability of oil. Of course, they have built a significant stockpile, their own SPR, which holds between 1.2 -1.5 billion barrels, enough to supply the nation for upwards of 4 months.  While not an immediate concern, it will start to hurt after a while if this continues.

It appears to me that unless Iran starts targeting and destroying oil production facilities throughout the Middle East, which is certainly possible, the upside for prices from here is limited under current circumstances.  My guess, and it is just that, is another 10%.  Of course, the risk for Iran there is that it draws the Saudis, Emiratis and the rest of the Gulf into the war against Iran, probably not a desired outcome either.  

As an aside, I wonder if prices rise far enough in a worst-case scenario, if the UK removes its drilling restrictions, although thus far, PM Starmer has not indicated anything of the sort.  It depends on just how painful things become I suppose.

Moving on to the equity markets, while US markets have declined somewhat since the war began, the S&P 500 remains just 2.5% below its all-time high set February 28, and as you can see from the chart below, does not appear to be altering the recent trajectory in any meaningful fashion.

Source: tradingeconomics.com

However, the same cannot be said for several other markets, notably those in Asia.  The Kospi (-12.1%) is the worst offender as seen below.  But weakness in the region was widespread with the Nikkei (-3.6%), Hang Seng (-2.0%), Taiex (-4.3%) and Thailand’s SET 50 (-5.4%) leading the way lower with most other bourses falling on the order of -1.0% to -2.0%.  This makes sense as virtually all these nations rely on energy from the Middle East, and with both higher prices and reduced supply, trouble is afoot.

Source: finance.yahoo.com

Of course, as you can also see in the KOSPI chart above, with similar price action elsewhere in the region, these stock markets have been on a tear given their tech focus (Korea’s two largest companies are Samsung and SK Hynix, both semiconductor manufacturers) so there was some room for a reversal.  In fact, remarkably, despite the KOSPI having fallen almost 20% this week, it remains above its trend line.  My take is this is a major correction and something we will see until things in the Middle East settle down.

Working in favor of my correction explanation is the fact that European bourses, which all fell sharply yesterday, are all higher this morning as per the below Bloomberg table.

 As to US futures, at this hour (7:30) they are little changed. 

Turning to the bond market, after some initial fears over the inflation implications of the war, as well as the selling that accompanies margin calls, yields have settled down a bit.  This morning Treasury yields (+2bps) are a touch higher but, at 4.08%, hardly running away.  As to European sovereign yields, they are essentially unchanged this morning, and even JGB yields (-2bps) slipped a bit last night.  As I discussed above, markets have digested much of the news and seem to have found a new equilibrium

I didn’t mention metals markets above, but this morning, in sync with other markets that are rebounding, we see the entire space higher; Au +1.7%, Ag +4.3%, Cu +1.1%, Pt +3.8%.  This story of insufficient supply to meet ongoing industrial demand has not changed, nor has the demand by both central banks and individuals, especially in Asia, to hold gold as a store of value.

Finally, the dollar is backing off slightly this morning, which given the price action elsewhere, makes perfect sense.  In the G10 space, the movement has been on the order of 0.1% to 0.2% for the majors (EUR +0.2%, GBP +0.1%, AUD +0.1%, CHF +0.2%) with only JPY (+0.35%) and SEK (+0.8%) showing real gains.  However, it is important to remember that SEK was one of the worst performers recently, so had more ground to regain.  As to the EMG bloc, movement there has been more substantial, but again, this is after much larger declines.  For instance, BRL (+0.6%) and KRW (+0.9%) have both seen sharp declines in the past week before reversing overnight as per the below chart.

Source: tradingeconomics.com

However, if we look at the DXY as our proxy, it remains in the middle of its trading range of the past 9+ months.

Source: tradingeconomics.com

In sum, we are three trading days into an entirely new geopolitical situation, and markets have digested the news and are seemingly trying to return to some sense of normalcy.  Now, there is still significant headline risk as nobody knows how things will evolve here.  What I will say is that if the Iranian regime falls or capitulates, I would look for risk to be quickly scooped up while oil prices slide.  Conversely, if things drag on much longer than another month, I think we could well see investor concern over how this will impact the global economy, especially if oil prices remain in the $75 – $80/bbl range, which likely means equity markets will suffer.

To the extent that anyone is still looking at data, this morning brings the ISM Services (exp 53.5) and then we see Crude Oil inventories later this morning.  The Services PMI data throughout Europe and Asia was in line with expectations showing slow growth remains the story.  Chinese data was marginally softer for large companies and marginally stronger for small companies.  As well, the Fed’s Beige Book is released at 2:00 this afternoon.

However, I don’t see data as a driver yet, so headline risk remains the biggest one out there, but the indications are markets are starting to absorb the war and move on.

Good luck

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Bonds are a Flop

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The war has now widened in scope
And though all of us truly hope
It won’t last too long
We could, there, be wrong
As such we must all learn to cope
 
So, oil, right now, knows no top
While havens like bonds are a flop
There’s no place to hide
Thus, you must decide
If trading makes sense or should stop

Carl von Clausewitz, the 19th century Prussian military strategist, is credited with describing the fog of war in his 1832 book, On War.  “…three quarters of the factors on which action in war is based are wrapped in a fog of greater or lesser uncertainty.”  This is quite an apt description of things, even now with cameras literally everywhere in the world.  Context remains difficult to understand, and, of course, there is an enormous amount of propaganda from both sides of any conflict as the protagonists attempt to sway both their own populations and those of their opponents.

I highlight this because I continue to be amazed at the certitude with which some analysts proclaim to “know” how things will turn out.  As I have written elsewhere, nobody knows nuthin right now.  With that in mind, I would highlight the IMF’s statement yesterday which added exactly zero to the conversation, “It is too early to assess the economic impact on the region and the global economy. That impact will depend on the extent and duration of the conflict.”  Now, don’t you feel educated after that pronouncement?

At any rate, with more than a full day’s trading in financial markets, perhaps we can try to assess how things are going.  The first thing to note is that many alleged haven assets are not performing up to snuff, notably Treasury bonds, Japanese yen, Swiss francs and gold.  In fact, as of this morning, the only traditional haven that is performing as expected is the dollar.

It was just over a month ago when the cognoscenti were explaining that the euro above 1.20 was indicative of the dollar’s long decline into the depths of history.  I recall someone in my LinkedIn feed asking how soon the euro would trade through 1.25 and beyond.  I would argue that timeline has been extended somewhat, if you still believe that is likely to be the case.  Rather, as you can see in the below chart, the single currency (-0.8%) is now back below 1.1600.

Source: tradingeconomics.com

There are several things weighing on the euro right now.  First is the fact that they are energy price takers for every form of energy, so not only are higher oil prices hurting the continent, but NatGas there has exploded higher as per the below chart, rising 37% today and nearly 95% since the weekend.

Source: tradingeconomics.com

Recall, Europe has been trying to wean themselves off Russian gas, have been huge buyers of US LNG but also huge buyers of Qatari LNG, and with the Strait of Hormuz effectively closed (shipowners cannot get insurance so nobody transits the Strait), this is a problem.  Adding to the European problem is the fact that their storage levels of NatGas are extremely low for this time of year, about 30%, when typical levels in early March are near 50%.  We cannot be surprised at this price action.  So, while US NatGas (+6.3% this morning, 10% this week) has risen, it is currently trading at $3.14/MMBtu.  The comparable Eurozone price is $20.28/MMBtu.  Perhaps a weaker euro is not that surprising after all.  (As an aside, one of the reasons I find it difficult to accept the weak dollar story is that the US controls its own energy destiny and given energy is life and the economy, we are fundamentally in better position to perform going forward.)

But the dollar is strong against all comers again today as per the below table from 7:10 this morning.  Will this continue?  While nobody knows, my take is there is still ample room for further strength in the buck, probably another 3%-5% before it starts to impact other things significantly.

Source: tradingeconomics.com

I think the biggest surprise for most of us is the incredibly poor performance of the bond market, which has always been seen as a safe haven.  However, this morning, that is not the case at all as you can see from the Bloomberg table below.

My take is that there is only one thing we truly know about war, it is inflationary.  While the early signs are for energy prices to rise, war is a major consumer of resources that will never be recycled and therefore will require new baseline production.  As well, governments don’t fight war on an austerity budget, so you can be sure that there will be plenty of money around.  All that leads to higher prices and that is why bond markets are feeling pain around the world this morning.  If, as President Trump has indicated, this war ends in the next 4 weeks or so, we will be able to re-evaluate the inflationary and other impacts, but while I had thought bonds were going to perform well, clearly that is not the case right now.

Turning to commodities, oil (+6.75%) continues to rise and I expect will remain well bid until the fighting stops.  The prospects for higher prices from here remain dependent on whether Iran tries to destroy other Middle East production facilities and if they are successful.  Meanwhile, in the Western hemisphere, the US, Canada, and all of Latin America are going to be pumping at full strength for now.  So, while prices may tick higher, it is unlikely we will see any supply issues here.

Metals are another surprising trade this morning with gold (-2.65), silver (-7.8%) and copper (-2.3%) all sharply lower.  Given the sharp decline in equity prices I will discuss below and given the amount of leverage that is rampant in the equity markets, I think gold is a victim of ‘sell what you can, not what you want to.’  Arguably, there is some of that with bonds as well.  In a way, though, I am more surprised about silver and copper given their criticality in fighting the war.  Both are being consumed rapidly via weapons being deployed so this is more baffling to me.  However, I do not believe the longer-term thesis in either of these metals has changed, there is a supply shortage relative to industrial usage for both with no new supply on the horizon.  As such, I do see prices here rallying over time.

Finally, the equity markets are sharply lower almost everywhere.  The below Bloomberg table shows how major markets in Asia performed overnight and how Europe stacks up at 7:30 this morning.

What it doesn’t show is that the KOSPI in Korea fell -7.25%, nor that there were sharp declines in India (-1.3%), Taiwan (-2.2%) and Thailand (-4.0%).  You will also not be surprised that US futures are pointing much lower this morning, -1.5% across the board.  Yesterday’s performance was quite the surprise, I think, but today is much more in line with what we expected.

And that’s where things stand this morning.  obviously, the war is the only story that matters, so data releases are going to be secondary for now, even Friday’s payroll report.  At some point, I expect that traditional havens will play their role, but as leveraged positions continue to get unwound, it may take a few more sessions before we see that.  If you’re trading, smaller sizes make sense.  If you’re hedging, stick to longer term fundamentals I think.

Good luck

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No Longer the Same

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The world is no longer the same
So, now everyone must reframe
Their views on positions
And whether conditions
Allow them to still play the game
 
Most markets have priced fatter tails
With stock markets seeing net sales
But oil and gold
Seem likely to hold
Their gains across longer timescales

Here we are on Monday morning in a very different world than we left on Friday evening.  While there was much talk about whether a peace would be reached then, obviously that never happened.  Of course, at this point, there is no other story than the ongoing military action in Iran and the Middle East.  As this is not a news commentary, but a financial markets one, that is all I will discuss here.

Not surprisingly, we have seen some large moves across markets, and largely in the direction one would have expected regarding risk.  So, oil prices (+7.5%) have exploded higher as shipping through the Strait of Hormuz has ceased for now and there is no timeline for it to reopen.  Given ~20% of the daily global consumption of oil flows through that waterway, there should be no surprise here.  You can see from the chart below that as concerns grew regarding military action, oil’s price climbed and then, of course, gapped on the opening last night.

Source: tradingeconomics.com

Perhaps a bit more surprising to me is that Brent Crude (+7.5%) has moved virtually the exact same amount as WTI.  I only say that because Brent is the price basis for global oil outside the US which is obviously going to be more impacted than the US markets.  But the Brent chart is virtually identical to the WTI above.  As to the future, clearly, no market is more dependent on the Middle East conflict than this one, but at this point, there is no indication it is going to end very soon, so I expect prices to remain at least at current levels for now, and if the conflict starts to target oil production facilities, we could go quite a bit higher.

While we are looking at commodities, it should also be no surprise that gold (+2.1%) is higher this morning as it performs its historical role as a safe haven.  While not quite as extreme as the oil chart, the similarities between the two, as you can see below, are significant.  Of course, it was a bit more than a month ago when we had that dramatic sell-off in the precious metals, so this has all been a recovery from there.  But a grind higher punctuated with a gap last night is the gold story as well.

Source: tradingeconomics.com

Arguably, gold will have more staying power than oil as when the conflict ends, and my initial take is it will not be a forever war, oil will once again flow more freely.  Gold, however, remains a haven in an uncertain world and nothing seems likely to reduce uncertainty anytime soon.

The other two traditional haven assets are the dollar and Treasury bonds so let’s look at them next.  Starting with the dollar, it has done what it regularly does in an uncertain situation, it has rallied sharply.  As you can see from the below table, shot at 6:39 this morning, the dollar is firmer against every single major currency this morning.

Source: tradingeconomics.com

Too, using the euro as our proxy for the dollar writ large, you can see that the chart below looks almost identical to that of both gold and oil above.  (I have inverted the Y-axis to highlight the similarities.)

Source: tradingeconomics.com

It appears that markets began pricing in this event back in the middle of February, although the real move required the onset of the military action.

As to the last haven asset, US Treasuries, they are not really doing the job today.  Yields there have edged higher by 2bps this morning and we are seeing similar price action across the entire European sovereign space.  The two exceptions today are UK Gilts (+8bps), which seem to be trading on concerns the BOE is less likely to cut rates as higher oil prices will prevent inflation from continuing lower and JGBs (-4bps) which are serving their haven role well, arguably given the distance from the action and the fact that with yields above 2%, investors seeking safety feel they have some cushion.

Source: tradingeconomics.com

The treasury move was interesting as the initial trade, at last night’s opening, was for lower yields as per the chart above, but that has since reversed.  It could be investors are concerned over additional defense spending blowing out the deficit further but there is no clear signal or commentary I have seen yet on the subject.

Finally, it should not be surprising that equity markets around the world are mostly lower this morning as investors pull in their wings and await more clarity on the outcome and how long this will continue.  The exception to this was mainland China (+0.4%) which managed to edge higher, but otherwise, all of Asia and Europe are down on the day, some pretty substantially.  Below you can see a screenshot of futures markets at 7:00 with the type of movements ongoing.

Source: tradingeconomics.com

The MOEX is Russia’s stock market, so it is not clear what value that adds to the conversation and the TSX, Toronto, does not have a futures market, so the price represents Friday’s close.  But as you can see, all of Europe and all of Asia ex-China have fallen sharply.

And that’s where we sit this morning.  Ironically, there is going to be a significant amount of data released this week, including the NFP report on Friday, but it is not clear market participants will be paying close attention.  For good orders’ sake, I will list the data releases anyway.

TodayISM Manufacturing51.8
 ISM Manufacturing Prices59.5
WednesdayADP Employment45K
 ISM Services54.0
ThursdayInitial Claims216K
 Continuing Claims1840K
 Nonfarm Productivity Q44.8%
 Unit Labor Costs Q40.2%
FridayNonfarm Payrolls60K
 Private Payrolls65K
 Manufacturing Payrolls0K
 Unemployment Rate4.3%
 Average Hourly Earnings0.3% (3.6% Y/Y)
 Average Weekly Hours34.3
 Participation Rate62.5%
 Retail Sales-0.2%
 -ex autos0.1%
 Consumer Credit$11.8B

Source: tradingeconomics.com

To me, market dynamics now are entirely restricted to the ongoing Middle East conflagration.  Ultimately, war is inflationary, and for many firms it is quite profitable.  But right now, investors are mostly hiding under their desks, waiting for the smoke to clear.  Institutional investors are typically unwilling to buck a key narrative trend, and I see no reason to believe this time will be different.

While much of this price movement will likely reverse when the bombing stops, until then, be prepared for more volatility, not less.

Good luck

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Much Hotter

Posted on by

Remember when riots were seen
Across every TV’s flat screen?
Well, that’s in the past
As news of a blast
In Tehran, just one thing, can mean
 
The Middle East just got much hotter
And now every armchair war plotter
Will offer their views
Of which side will lose
So, traders, keep watch o’er your blotter

 

Is it a coincidence that Israel’s attack on Iran’s nuclear sites occurred on Friday the 13th, or was it meant as a message that luck, both good and bad, can be manufactured? Whatever the driver, the market reaction has been instantaneous.  Here is a look at the five-minute chart in oil with the black sticky stuff jumping more than 8% on the news.

Source: tradingeconomics.com

Too, gold jumped (+1.2%) as did the dollar (EUR -0.4%, AUD -1.0%) although both JPY (+0.3%) and CHF (+0.4%) showed their haven characteristics.  Treasury bonds rallied with yields slipping an additional -3bps in the evening session on top of the -5bp decline during the day, and stock futures are under pressure around the world (S&P500 -1.6%, Nikkei -1.5%, DAX -1.5%).  This was the early price action.

Those were last night’s initial moves and thus far, things have moderated a bit.  For instance, oil has fallen back about 1%, though remains higher by 7.3% and that big gap down on the charts from April has been filled.  

Source: tradingeconomics.com

Of course, there is now a new gap below the markets to fill, but that is a story for another day.  Equity markets are also finding their footing, bouncing off their lows as the 20-day moving average has held and dip buyers see this as an opportunity.  However, the dollar is little changed from its initial moves as is gold, and overall, not surprisingly, risk-off defines the overnight session and likely will be today’s focus.

Now, there is nothing funny about this situation with more death and destruction occurring and likely in our immediate future.  However, I could not help but chuckle at the Russian statement that Israel’s actions were “unprovoked” and “a violation of UN principles and international law.”  Of course, I guess President Putin would know all about unprovoked attacks and violating UN principles and international law given his ongoing efforts in Ukraine.

Ok, I am not a war plotter, nor a war monger, so let’s see how this and any other things are developing in the markets.  While the war discussion will dominate the headlines, there are other things ongoing that are worth considering.  For instance, though the dollar is performing as its historical safe haven this morning, SocGen analysts highlighted a very interesting relationship that has developed in the dollar with respect to inflation surprises over the past four months.  As you can see in the chart below, it appears that as we have seen a series of lower-than-expected inflation readings, the dollar has fallen in step.  Now, correlation is not causality but one could make the case that reduced inflation will lead to a more aggressive easing policy by the Fed and that could be the mechanism by which this relationship operates.

Along the same lines, there have been more stories regarding the softening in the US labor market and at what point the Fed is going to need to focus on that, rather than inflation, as they consider their policy objectives.  As well, the large contingent of analysts who expect the US to enter a recession soon have pointed to the labor market and the fact that much of the underlying data appears to show a less robust situation than the headlines have thus far revealed.  

I have two anecdotes to recount here, neither of which indicates the labor market is softening.  First, the local pizza parlor is at wits’ end trying to hire people to work there, a common high school summer or after school job but there are no takers.  Second, my daughter works for a TMT consulting firm in HR, and they are seeking to hire several new analysts and junior consultants, jobs that pay six figures out of college, and they, too, are having difficulty filling the roles.

I know that anecdata is not definitive, but two very disparate service industries are facing the same issue, and it is not a question as to whether to reduce headcount.  Consider the idea that the recent declines in inflation readings are a short-term outcome and that underlying inflation remains in the 3.5%-4.0% range.  Given median CPI is still running at 3.5%, that is entirely feasible.  If, as we go forward, we start to see high side surprises in inflation, and this relationship has meaning, that could well imply we are looking at a short-term dip in the dollar and that as the year progresses, this will reverse.  My take is that the Fed will only consider cutting rates, at least as long as Powell is Chair, if inflation remains quiescent and unemployment starts to rise.  But if inflation rebounds, I believe they will be reluctant to go there.

Now, as the morning progresses, the dollar is picking up steam with the euro (-0.8%), pound (-.6%) and JPY (-0.6%) all falling, even the havens yen and CHF (-0.5%).  In fact, looking across the board, every major currency is weaker vs. the dollar at this point in the morning (7:15).  As the US has awakened, it seems that the haven status of the dollar is reasserting itself.

Perhaps more surprisingly, Treasury yields have turned around and are now higher by 2bps, which has dragged all European sovereigns along for the ride.  In fact, the weakest nations (Italy +4bps, Spain +5bps) are faring even worse, as is the UK (Gilts +5bps).  Apparently, the recent ideas of the BOE getting more aggressive in its rate cutting is no longer the idea du jour.

In the equity markets, red remains the only color on the screen with Asian markets (Nikkei -0.9%, Hang Seng -0.6%, CSI 300 -0.7%) all rebounding from their early worst levels, but slipping on the day, nonetheless.  I guess there are dip buyers in every market 😃.  In Europe, continental bourses are all sharply lower (DAX -1.4%, CAC -1.1%, IBEX -1.6%) although the FTSE 100 (-0.4%) is holding up better.  As to US futures, they have rebounded slightly from their earliest lows and are now down about -1.0% at 7:20.  Wouldn’t it be something if they closed the day higher?  I don’t think we can rule that out!

Finally, commodities continue to show oil much higher, no retracement there, and gold also holding its gains although copper (-2.5%) is under pressure.  This is a bit odd to me as I would have thought war would bring more copper demand to a market that is physically undersupplied, but then the LME price of copper and the COMEX price of copper seem unrelated to the industrial flows of late.  At this time, everyone is waiting for the Iranian response, although apparently, the first response, a wave of drone attacks on Israel, was completely thwarted.  Not only did Israel destroy some key nuclear sites, but they were able to eliminate almost the entire leadership of the Iranian army and special forces, so any response is likely to take a little time to be created. No oil facilities were targeted, although the Strait of Hormuz is a key chokepoint in the oil market and Iran is likely able to disrupt the flow of tankers through there for now.  What we know is that everyone who was short oil as a trade has likely been stopped out.  It will likely take a little time before new shorts come back to play, so I expect a few days of prices at these levels.  However, the longer-term trend remains lower, so absent a destruction of oil producing fields, I expect that prices will retreat ahead.

On the data front, this morning brings only Michigan Consumer Sentiment (exp 53.5) and with it the inflation expectations piece, although that has been shown to be a political statement, not an economic one.  I cannot shake the feeling that by the time we head to the weekend, equities will have recovered their early losses, and the dollar will cede some of its gains.

Good luck and good weekend

Adf

Inundated

Posted on by

Investors have been inundated
By news that has been unabated
There’s tariffs and war
Plus rate cuts and more
With stocks and bonds depreciated
 
Now looking ahead to today
The payroll report’s on its way
As well, later on
With nothing foregone
We’ll hear from our own Chairman Jay

 

It has certainly been an interesting week in both markets and the world writ large.  So much has happened and yet so much is still unclear as to how things may evolve going forward.  Through it all, volatility is the only constant.  To me, what has become abundantly clear is the post WWII order is being dismantled, and every nation is trying to determine its place in the future.  This is a grave threat to those who benefitted from flowery words and limited action, which covers a wide swath of government leaders around the world.  I’m not sure if this is the 4th Turning, or if this is merely the prelude, with the impacts of all these changes what brings the 4thTurning about.  Regardless, history is clearly in the making.

I do not have the bandwidth to continuously follow the tariff story, although yesterday’s news was there will be more delays for both Canada and Mexico.  China received no such relief and at their National People’s Congress they seemed resolute in their pushback and highlighted their own achievements.  The data from China, though, tells me that their goals for more domestic consumption remain far in the distance.  Last night they reported their Trade Balance for the January/February period (they always combine because of the Lunar New year disruptions) and it jumped to $170.5B, far greater than anticipated.  While exports underperformed slightly, growing only 2.3% compared to a 5% estimate, it was the imports that really tells the story.  Imports fell -8.4%, a significant shortfall from both last year and consensus estimates, and an indication that the Chinese consumer is not yet the type of force that President Xi would like to see.  

In fact, a look at the chart below showing imports for the past 10 years demonstrates that very little has changed on this front.  As I wrote yesterday, converting a mercantilist economy into a consumer-focused one is a huge lift, and one that the CCP has not yet figured out.  It is not clear that they ever will.  Meanwhile, the obvious explanation for the huge jump in the trade balance was companies pre-ordering things to get ahead of the tariffs.

Source: tradingeconomics.com

Moving on to the Ukraine situation, while yesterday’s news was of the “whatever it takes” moment for defending Europe, this morning it seems there are some caveats attached.  Of course, the first caveat is the changing of the German constitution to allow them to spend all that money.  The second seems to be that not every European nation is on board for the massive spending increase and continuation of the war.  There are many political and financial hurdles to overcome in this story in Europe, and this morning’s European equity markets are indicative of the idea that this is not a straight-line higher.  In fact, every equity market in Europe is lower this morning, led by the DAX (-1.5%) although with solid declines elsewhere as well (CAC -1.0%, FTSE 100 -0.5%).  This, too, is a story with no clear end in sight.  One unconfirmed story I saw was that the group convened by the UK last weekend has not been able to agree terms for additional support.

Meanwhile, yesterday the ECB cut their short-term rates by 25bps, as widely expected, with the Deposit Rate now down to 2.50%.  The funny thing is nobody really noticed.  This is of a piece with my observation that central bankers just don’t have that much sway on market activity these days, it is all about politics and statecraft, not monetary policy.  This morning, Eurozone GDP for Q4 was released at 0.2%, a tick higher than forecast but still lower than Q3’s 0.4%.  There is no doubt the financial mandarins of Europe are keen to get this defense spending going, because otherwise they will continue to preside over a stagnant economy.  

But here’s an interesting thing to consider.  Germany has made a big deal about this new willingness to spend €500 billion outside the bounds of their budget framework on defense.  However, they continue with their Energiewende policy which has been the Achilles Heel of the German economy and will prevent them from actually producing armaments if they seek to continuously reduce fossil fuel powered energy for renewables.  It is almost as if this is theater, rather than policy, but that may just be my cynicism speaking.

Moving on to the US, this morning brings the Payroll Report with the following current median estimates:

Nonfarm Payrolls160K
Private Payrolls111K
Manufacturing Payrolls5K
Unemployment Rate4.0%
Average Hourly Earnings0.3% (4.1% Y/Y)
Average Weekly Hours34.2
Participation Rate62.6%

Source: tradingeconomics.com          

As well, we hear from Chairman Powell at 12:30pm, along with Bowman, Williams and Kugler in the hours leading up to that.  But again, I ask, do they matter to the markets right now?  Certainly, there is much discussion that the US economic data is starting to show more weakness, and there are many who are saying that long-anticipated recession is going to become evident.  If that is the case, we could certainly see the Fed cut rates, but again, my take is markets are far more attuned to 10-year yields than Fed funds.  And remember, while 10-year yields are clearly quite inflation sensitive, what we also know that questions over budget deficits and supply are critical to their pricing as well.  This was made evident yesterday in Germany.

I have glossed over market activity overnight so will give a really short update here.  Yesterday’s weakness in the US was followed by broad weakness throughout Asia, with most markets there lower on the day, notably Japan (-2.2%), but declines almost everywhere.  We have already discussed European bourses and at this hour (7:30) US futures are basically unchanged ahead of the data.

In the bond market, Treasury yields are slipping back -3bps this morning and we are seeing similar price action across most of Europe although Spain (+1bp) is bucking the trend on some domestic issues.  It is easy to believe that the Germany story was a bit overblown, and remember, if they cannot change the constitution, I expect a rally in Bunds (lower yields) along with a selloff in the DAX and the euro.

Speaking of the euro, it is continuing its sharp ascent, up another 0.6% this morning.  however, something to keep in mind regarding all the huffing and puffing about the euro is that with this sharp move higher in the past week, it is merely back to the middle of its 3-year trading range.  So, is this as big a deal as some are saying?

Source: tradingeconomics.com

But the overall currency picture is more mixed with both AUD (-0.6%) and NZD (-0.5%) lower along with CAD (-0.2%).  There are other gainers (GBP +0.2%, SEK +0.7%) and other laggards (ZAR -0.2%) although I would say the broad direction is still for dollar weakness.  

Finally, oil (+1.5%) is bouncing this morning, although this could well be a trading bounce as I have seen no new news on the subject.  I guess the delay on Canadian tariffs probably played a role as well.  Gold (+0.4%) is also firmer although both silver (-0.4%) and copper (-1.2%) are lagging.  In fairness, the latter two have had significant up weeks so are likely seeing some profit taking.

Once again, I will remark that for those who have real flows and exposures, the current market situation is why hedging is critical to maintain financial performance.  Nobody really knows where anything is going to go, but right now, it feels like the one thing we know is prices will not remain where they currently are for very long.

Good luck and good weekendAdf

Balling Their Fists

Posted on by

The world is no longer the same
Since Trump put Zelenskiy to shame
Now Europe insists
They’re balling their fists
And this time it isn’t a game
 
But markets just don’t seem to care
That, anymore, war’s in the air
Instead, what’s decisive
Is that the new price of
All cryptos has answered their prayer

 

Last Friday’s remarkable live TV meeting between Presidents Trump and Zelenskiy in the Oval Office has rocked the entire world, or certainly the entire Western World.  The unwillingness of Zelenskiy to consider a ceasefire and Trump’s dismissal of him from the White House, even before lunch, has clearly changed a lot of views of how things are going to evolve from here.

The most noteworthy result is the sudden realization by the EU and NATO that the US is committed to ending the war and is not interested in spending much, if any, more money on the subject.  The response by the EU, an emergency meeting in London yesterday where every nation committed to a strong defense of Ukraine, including boots on the ground, is remarkable.  My fear is that if they proceed along these lines, and French or British soldiers are attacked/shot during the conflict, NATO will seek to invoke Article 5 and drag the US into the conflict.  Certainly, that appears to be Zelenskiy’s goal, to get the US to fight Russia on their behalf.  (Although, there are those who might say the Biden administration was using Ukraine to fight Russia on their behalf, so this is justified not surprising.). In the end, I believe this path is terrifying as that would result in two nuclear powers meeting on the battlefield, perhaps a cogent definition of WWIII.

However, there is little evidence that market participants are terribly concerned about this situation.  Perhaps they are confident that this is all bluster and ultimately President Trump’s plan of increasing US economic interests in Ukraine will be enacted and a sufficient deterrent to prevent that outcome.  Or perhaps this is a YOLO moment, where the belief is, if nuclear war destroys the world, I can’t stop it, so I better make as much money as possible now.  I recognize geopolitical risk is tough to price, but I would have expected a lot more flight to safety than so far seen.

In fact, in markets, the true story of the weekend was the announcement of a cryptocurrency reserve to be created by the US although no specific size was revealed.  While I don’t typically write on the topic, that is because the crypto space has not yet, in my view, become enough of an influence on the macro world to matter.  However, this could change that.  

Source: tradingeconomics.com

One cannot be surprised that crypto currency prices have rallied dramatically on the back of the announcement, which almost seemed timed to arrest what had been a very sharp decline in those prices recently.  It is too early to really determine if this will draw cryptocurrencies closer to mainstream economic and financial discussion, but I would argue it is closer now than it has ever been before.

In Europe, the scoop on inflation
Does not seem ripe for celebration
While CPI slipped
Most forecasts, it pipped
So, slower but not near cessation

Eurozone CPI data was released this morning and the response to the outcome is quite interesting.  The data showed that headline fell from 2.5% to 2.4%, while core fell from 2.7% to 2.6%.  Obviously, that is a step in the right direction.  Alas, analysts’ forecasts were looking for a 0.2% decline in both readings, so while the data was good, it was worse than expectations.  In a perfect encapsulation of how narrative writing is so critical, both the WSJ and Bloomberg wrote articles explaining how the declines had set the table for the ECB to cut rates at their meeting this Thursday with neither one discussing market forecasts.

Now, a look at the market response shows that European sovereign yields have all risen between 6bps and 9bps, hardly the response one would expect in a lower inflation world.  As well, with Treasury yields higher only by 5bps this morning, as they bounce from their recent declines, the euro (+0.7%) has rallied sharply on the day.  

Much has been made of the European’s new commitments to increase defense spending, especially in the wake of yesterday’s meeting discussed above, and the requisite increases in defense spending that would accompany this new stance.  However, increased European defense spending has been a story for the past many weeks as President Trump has been railing against European members of NATO for not holding up their end of the bargain.  I guess the meeting added a greater sense of urgency, but remember, not an additional dime has been spent yet, nor even legislated.  Talk is cheap!

But there you have it.  Despite what appears to be a giant step closer to a major global conflagration, the market response has been a more classic risk-on result, with bond yields rising, the dollar falling and most equity indices doing fine.  Some days, things don’t make much sense.

Time for a quick recap of overnight markets then.  Friday’s strong US equity rally was followed by strength in Tokyo (+1.7%) and Australia (+0.9%) although both Hong Kong and China were little changed in the session. It appears Chinese traders are awaiting the news from Wednesday’s NPC meeting where the government will define their economic growth targets for the current year and how they might achieve them.  In Europe, Spain (-0.1%) is the laggard with the rest of the continent doing well, led by Germany (+1.1%).  It seems there are more defense companies there to benefit from all this mooted spending than elsewhere, hence the rally. Lastly, US futures are higher by 0.35% or so at this hour (7:00).

We have already discussed bonds, where yields are higher everywhere, including Japan (+4bps) as all the war talk has investors convinced there will be a lot more government borrowing everywhere in the world going forward.

In the commodity markets, oil (+0.25%) has been trading either side of unchanged in the overnight session but seems to be consolidating after last week’s declines.  I continue to believe that if the Ukraine war does end (and I believe that will be the outcome regardless of Europe’s hawkish turn), oil prices are likely to slide further as one of the likely outcomes will be the end of sanctions against Russian oil and Russian oil transports.  Meanwhile, gold (+0.6%) which had a rough week last week, is bouncing and dragging the entire metals complex higher with it.  If war is truly in the air, gold and silver seem likely to rally further.

Finally, the dollar is under great pressure this morning across the board.  Not only is the euro higher, but only JPY (-0.4%) is weaker vs. the dollar in the G10 as this seems a very risk-on initiative.  SEK (+1.3%) is the leader, perhaps because it is on the front lines of the potential war?  Seriously, I have no explanation there.  But EMG currencies are also rallying with HUF (+2.1%) the big winner, although the entire CE4 is stronger.  Again, this makes little sense to me if the politics is pushing toward war as all those nations are on the front lines.  Meanwhile, MXN (+0.4%) is managing to rally despite the ongoing threat of tariffs to be imposed tonight at midnight.  I continue to read numerous stories on the potential impacts of tariffs with dramatically different takes.  In the end, it appears that at least some things will go up in price, although fears of widespread massive price rises seem a bit overdone.

On the data front, along with Thursday’s ECB meeting, Friday brings the payroll report and there is plenty of stuff between now and then.

TodayISM Manufacturing50.5
 ISM Prices Paid56.2
WednesdayADP Employment 140K
 ISM Services52.9
 Factory Orders1.6%
 -ex Transport0.3%
 Fed’s Beige Book 
ThursdayECB Rate Decision2.75% (current 3.00%)
 Trade Balance-$93.1B
 Initial Claims340K
 Continuing Claims1870K
 Nonfarm Productivity1.2%
 Unit Labor Costs3.0%
FridayNonfarm Payrolls153K
 Private Payrolls138K
 Manufacturing Payrolls5K
 Unemployment Rate4.0%
 Average Hourly Earnings0.3% (4.1% Y/Y)
 Average Weekly Hours34.2
 Participation Rate62.6%
 Consumer Credit$15.5B

Source: tradingeconomics.com

In addition to this, we hear from 7 more Fed speakers at 9 venues including Chairman Powell Friday afternoon at 12:30.  Now, I have made a big deal about the fact that the Fed has lost much of its sway in the market to President Trump.  I believe that Powell’s speech will tell us much about whether they are unhappy about this, or whether they will be quite comfortable sinking into the background.  Given Powell’s previous antagonistic relationship with President Trump, I would think it would be the latter.  But every central banker seems drawn to the limelight like moths to a flame, so I would not be surprised to see something more dramatic.

As things currently stand, I see the ongoing efforts to cut government spending as a critical piece of the US fiscal puzzle.  The more success that DOGE and the administration has in this process, the better the potential outcomes for the US, tariffs or not.  This could increase private sector activity and reduce the deficit, thus slowing the debt issuance, and perhaps, weighing on inflation.  However, this is a longer-term process, not something that will happen in weeks, but over quarters.  In the meantime, I cannot get past the Ukraine situation as the biggest potential risk factors around, and if escalation is in the cards, I would expect Treasury yields to decline amid growing demand while the dollar rallies along with the yen as a haven.  Hopefully not but be prepared.

Good luck

Adf

Obliteration

Posted on by

The chance of a much wider war
Is something we need to plan for
Thus, havens ought be
A key thing we’ll see
Demanded, as prices will soar
 
The thing is that war and inflation
Have partnered through history’s duration
While prices may rise
Most nations surmise
That’s better than obliteration

 

The weekend just passed saw what could be the next step to a wider war in the Middle East after Iran launched a massive air assault on Israel.  While it seems to have been fully repelled, with limited damage and injury, the world is waiting on tenterhooks to see if there will be a counterattack by the Israelis.  In a different time, with a different set of leaders around the world, perhaps the next steps would be talks and negotiations designed to stop the madness.  But in the current world, with the current global leadership, there is no sign that anyone is capable of driving that particular outcome.

With this in mind, I think it is important to remember one very real truism, war is inflationary.  It always has been, and it always will be.  Consider that every nation at war will spend as much as they can to produce and procure the weaponry they need to combat that war.  And they will borrow the money as that is the fastest way to move that process forward.  Second, scarcities will develop across an economy as inputs that would otherwise have gone toward ordinary consumer goods will be repurposed and commandeered toward the war effort.  The upshot is that demand will rise while supply will dimmish, a perfect recipe for inflation.

If we take that set of generalities and apply it to today’s situation, the starting point is already sticky high inflation with a massive debt load, at least in the US.  Elsewhere in the world, inflation appears to be starting to ebb, although the numbers remain well above the near-universal 2.0% target.  On the debt question, pretty much everybody has too much of that!  Of course, the situation in the US is the most important because it is the nation that is likely going to be financing a large proportion of any increase in hostilities despite the recent comments that the US will not take part in any Israeli retaliation.

Ultimately, though, even if we see a de-escalation of this situation, nations everywhere are going to be building up their war making capabilities given the overall level of uncertainty in the current world.  While Russia/Ukraine continues apace, and Israel is still fighting in Gaza, those are simply the issues that make the headlines.  Fighting continues throughout Africa (Nigeria, South Sudan Mali, Somalia, Congo) as well as in Iraq, Syria, Yemen and Pakistan.  This may be one of the least reported and most consistent drivers of global inflation that exists.  All I’m saying is that the combination of the current geopolitical situation and the still lingering effects from pandemic era policies has virtually ensured that inflation is not going to fall, at least not very far.  That means that haven assets and hard assets, often the same assets, remain high on the list of investments that are likely to perform well going forward.  Keep that in mind as you establish both your planning and your hedging.

With those cheery thoughts in mind, let’s see how markets have handled the next step up this escalator. Friday’s US equity market declines, which some have attributed to tax selling (today is Tax Day after all) was followed by weakness throughout most of Asia.  The exception was mainland China, which saw the CSI 300 rise 2.1%.  But elsewhere in the time zone, red was the color of the day, with Japan (-0.75%), HK (-0.75%), Australia (-0.5%), South Korea (-0.5%) and virtually every other regional equity market declining.  It seems that investors there are not so sanguine about a war in the Middle East.  

In Europe, though, as there is rising hope that things won’t get worse in the Middle East, equity markets are rebounding with most major indices higher by between 0.5% and 1.0%.  While that may be an optimistic reading of the situation, it is spreading as we have also seen early some gains in commodity prices back off.  The one exception here is the UK (-0.5%), but there is no obvious catalyst that is different for the outcome.  As I always say, sometimes markets are simply perverse.  Lastly, US futures markets are pointing higher as well, about 0.4% across the board at this hour (7:00).

Turning to the bond markets, it appears that inflation fears are greater than haven demand this morning. Treasury yields are higher by 5bps after a modest decline on Friday, while European sovereigns are seeing similar gains in yield, between 5bps and 7bps across the board.  While I understand the Treasury reaction given rising inflation expectations according to the Michigan Survey data released Friday, the European one is more confusing.  Even uber-hawk Robert Holtzmann agreed that a cut in June is likely, although future moves will be data dependent, and he is the most hawkish member of the ECB.  While inflation data throughout Europe has been declining, perhaps the bond markets are telling us they don’t believe that will continue.  Something doesn’t jibe with the recent comments and price action, and in that case, I always assume the pricing is correct.

In the commodity markets, oil (-0.8%) is lagging today as the ebbing fears of a wider Middle East conflict weigh on the black sticky stuff.  With that in mind, remember that oil prices are higher by nearly 4% over the past month, so this bull run does not appear dead yet.  However, metals remain in demand as we are seeing gains across gold (+0.7%), silver (+2.1%), copper (+1.2%) and aluminum (+2.1%).  I believe this story remains a combination of supply concerns as well as stories about excess demand from China, where copper stockpiles have been growing rapidly.  While it is not clear why they are buying copper, it is just one of several metals, notably gold, that China has been acquiring aggressively over the past months.  I maintain that this space has much further to run higher.

Finally, the dollar is under pressure this morning, although not universally so.  While the bulk of the G10 is modestly firmer, on the order of 0.2%, JPY (-0.5%) continues to suffer and is now pushing toward 154.00.  The last time USDJPY traded at this level was June 1990.  However, as long as the monetary policies between the US and Japan remain on divergent paths, the only thing that will stop this is concerted intervention, and the US seems unlikely to take part in such a move.  In the EMG bloc, the dollar is also on its back foot with MXN (+0.5%) the leading gainer and most of the rest of these currencies higher by much smaller amounts.  I would note CNY has rallied a touch after the PBOC withdrew CNY70 billion of liquidity as part of their money market operations today.  The Chinese are caught between the need for more stimulus to support the economy and the fear that more stimulus will lead to lower rates and capital flight, something which they have worked very hard to prevent.

On the data front, as exciting as last week was, this week should have some pretty good follow-ups.

TodayEmpire state Mfg Index-9.0
 Retail Sales0.3%
 -ex autos0.4%
 Business Inventories0.3%
TuesdayHousing Starts1.48M
 Building Permits1.514M
 IP0.4%
 Capacity Utilization78.5%
WednesdayFed’s Beige Book 
ThursdayInitial Claims214K
 Continuing Claims1820K
 Philly Fed0.8
 Existing Home Sales4.2M
 Leading Indicators-0.%

Source: tradingeconomics.com

As well as this, we hear from eleven more Fed speakers, including Chairman Powell tomorrow afternoon at the IMF spring meetings.  It will be quite interesting to hear how he handles the three consecutive hotter than expected CPI prints and whether there is going to be a subtle change in tone.  If he were to ignore it, I think that will be quite negative for bonds as it becomes a clearer indication that the 2% target is dead.

The thing about the 2% target is if the Fed abandons it, you can be sure that every other central bank will do the same.  That means that more rate cuts will be coming more quickly.  That, my friends, is a recipe for higher inflation, higher commodity prices and a much weaker bond market.  As to the dollar in that scenario, my take is it will still be the proverbial ‘cleanest shirt in the dirty laundry’ and will hold its own.

Good luck

Adf