Said Kevin, the Fed’s now MY house And views that we choose to espouse Will no longer guide So, when we decide To move, we expect some to grouse
As well, we are set to review Our policies all the way through So, comms will be changed And data arranged In truth, it is quite the to-do
This is an evening note as I will be unavailable to write tomorrow morning as we head off to show GCH Nubia’s Take Your Breath Away, aka Marvel to a show. That is his handler and the judge who awarded him Best of Breed that day.
But not surprisingly, the only thing that really mattered today was the FOMC meeting. I have to say, having watched the entire press conference I am really impressed with Chairman Warsh. I love the fact that he shortened the statement and that they are ending forward guidance. And it was quite interesting that half the reporters’ questions were trying to get guidance about what the Fed may do in the future, despite him repeating that there was no more forward guidance. My take is Fed reporters are going to have to learn about how markets work and more importantly, market practitioners are going to make up their own minds rather than rely on the Fed to bail them out. This is all really positive!
The most noteworthy thing was the creation of five task forces to address issues with the way the Fed currently does things on the following subjects:
Communications
Balance Sheet
Data Sources
Productivity and Jobs
Inflation Framework
So, it strikes me that Chairman Warsh is going to look to reprogram the Fed, something that has been sorely in need. Do not be surprised when much of the commentary is negative on these subjects because those are the folks who benefitted from the old way of doing things. They now need to change their models and their narratives and they are unhappy. Another benefit.
The upshot of the meeting was that rates were left on hold and the dot plot, where Warsh did not supply a dot, showed that half the committee thought rates appropriate, and half thought they would be higher by the end of the year.
Of course, this largely jibes with the Fed funds futures market as you can see in the latest table from the CME.
Of course, looking at this table, something seems amiss for September, perhaps there was a large position put in place that drove the market. At any rate stock markets were unhappy with the major indices slipping -1.0% or more after the FOMC although bonds did very little and commodities continue to show oil slipping while gold and silver rise. As to the dollar, it rallied pretty much across the board.
It is way too early to anticipate exactly how things are going to play out, but I am encouraged. I strongly believe a little price volatility is a small price to pay to reduce systemic risk by reducing leverage in the system, and that is very likely to be the outcome if Mr Warsh has his way. My forecast is the “ample reserves” balance sheet program is going to change before he is done. If that is the case, I think they will have a real opportunity to get inflation under control. As well, I believe that prospect will undermine much of the ‘death of the dollar’ narrative. It truly will be significant. We shall see.
The story today is the Fed And whether, when looking ahead Inflation they see Stays well above three Or if it just might fall instead
Meanwhile, every comment I’ve read Discussing the ‘deal’ have all said Too much was conceded The US retreated And look to the future with dread
Starting with the MOU with Iran, and having read the text of the agreement, at least the one published by Bloomberg, Iran has sworn to never have a nuclear weapon and then will effectively be readmitted to polite society, with sanctions and restrictions eventually removed. The several comments I have read on the deal highlight numerous potential loopholes and semantics regarding tolls and fees and are uniformly unhappy with the deal. But I’ve also read that many on Iran’s side are unhappy with the deal. Arguably, the best sign the deal is going to last is just that, neither side got everything they wanted, but both got some of the things they wanted. Time will tell how this all plays out, but certainly the oil market remains positive that the direction of travel is toward a normalization of flows through the Strait of Hormuz.
However, while the political pundits are going to continue to focus on that issue, markets have turned their focus to the FOMC meeting and how things play out under new Chairman Kevin Warsh. The previous Fed whisperer, Nick Timiraos at the WSJ, continues to push Governor Powell’s message as there is not yet a new Fed whisperer. My take is Timiraos will not be the one simply because his loyalties will not lie with Warsh.
The thing in which we can be most confident is there will be no rate change at today’s meeting although the market continues to price a rate hike in December as per the below CME table.
All the drama will come with the release of the SEP (Summary of Economic Projections) which is the quarterly document the Fed publishes showing the range of economic forecasts by the individual FOMC members regarding GDP, Unemployment and interest rates. This document also includes the dot plot. It is important to note that the SEP only started to be released in 2007, so this is not a long-standing tradition, but part of Ben Bernanke’s changes to the institution.
And this is a key feature of what makes Kevin Warsh different. He has indicated that the Fed talks too much (I agree) and believes that some ambiguity in what is going on is a desired outcome. This is a controversial stance as Wall Street has minted money on the back of forward guidance, recognizing the Fed has their back whenever they blow up because they built up huge leverage and were wrong.
While I completely understand the idea that political discussions need to be in the open, I am far more suspect with respect to monetary policy discussions. Prior to forward guidance, market participants were far more cautious in their positioning as the probability of getting the direction of a trade wrong was far greater. But once the Fed says, ‘rates are going to stay low for a very long time’, traders can lever up positions massively relying on the fact that their funding costs are going to remain in check. And it is the massive leverage where the risks to the market lie, not the level of rates per se.
So, the question today is how Chairman Warsh will handle his desire to reduce communications compared to the previous actions of publishing the data and numerous FOMC members speeches. One thought is he may refuse to put his own forecasts into the document, a sign of what he wants going forward but I am confident he has other ways to move forward.
The other issue is the question of the tone of the statement, which had ostensibly been leaning dovish but seems now likely to be neutral. My sense is whatever he does, it will be incremental, at least at the beginning, but I anticipate that he is going to make substantial changes to the way the FOMC operates during his tenure as that is why he was put in the role.
So, with that as our backdrop, let’s see how markets have absorbed the text of the deal as we all await the FOMC this afternoon. Yesterday’s mixed US performance, with only the DJIA managing a gain while tech stocks dragged down both the NASDAQ and the S&P, was followed by more positivity than not in Asia with gains in Japan (+0.7%), China (+1.0%), Korea (+1.6%) and India (+0.5%) while HK (-0.75%) slipped a bit. It is always a bit of a surprise when HK and China move in opposite directions, and it seems today’s split arose from different interpretations from a policy conference regarding future PBOC activities as well as potential future government support for a clearly weakening consumer economy. Other regional exchanges had a mix of gainers and laggards as well, as the overall session was directionless.
In Europe, the picture is also mixed although the movement has been more muted than those in Asia. Both Germany and the UK are flat to slightly lower this morning with the former under pressure after BMW offered a terrible profit forecast while the latter, despite lower-than-expected inflation readings, is lagging on growth concerns. However, France (+0.2%) and Spain (+0.5%) have both managed to rally a bit on some slightly positive earnings news. As to US futures, at this hour (7:15), they are modestly higher across the board.
Bond yields are generally little changed this morning with only UK gilts (-5bps) and JGBs (-4bps) showing any movement at all. Gilts responded positively to the inflation data while JGBs seemed to take solace in the trade data showing Japan was back to a deficit.
In the commodity markets, oil (+0.7%) is having a very quiet session after several sharp declines in a row while metals markets are largely unchanged this morning. It appears even traders here are awaiting the FOMC outcome. One thing I have seen is a recent report from the World Gold Council showing 45% of central banks surveyed plan to buy the barbarous relic in the next 12 months.
And finally, the dollar is slightly stronger this morning, but like most other markets, not showing much movement at all. The below chart of the DXY for the past month shows just how lackluster price action has been with a total range of just 1.5%. The red line is the midpoint of that range showing there is just not a lot of pressure in either direction right now.
Source: tradingeconomics.com
Meanwhile, USDJPY has basically spent the past two weeks hovering just above 160.00 with nary a peep from the MOF or BOJ. Again, the situation there is the policy changes necessary to strengthen the yen are likely to have very negative economic consequences initially, and that is not something any government is likely to do.
On the data front, ahead of the Fed we see Retail Sales (exp +0.5%, +0.5% ex-autos) and then the EIA oil inventories with more draws expected. And that’s really all there is. I anticipate a very quiet session ahead of the Fed and then all will depend on how the market interprets Warsh’s signals.
With things in the Gulf getting hotter And risk assets heading to slaughter The question on lips Can stocks e’er eclipse Their highs, or ‘stead sink ‘neath the water
But really, the question I’d ask Is Chairman Warsh up to the task Of changing the fate Of the Fed funds rate And if so, what will he unmask?
Michael Every was on and expressed a very interesting thought, one that I had not considered, nor heard anywhere else. What if the Fed, as Chairman Warsh seeks to adjust how it works, decides that they are going to put their fingers on the scale with respect to the interest rates paid by different industries, not merely by differently rated credits. The idea is that in conjunction with the Treasury, Warsh and Bessent would decide which industries needed to have the most cost-effective funding for the nation to be able to maintain and develop the industries necessary for national defense reasons.
Now, I know this is anathema to almost all of us having been raised on the idea(l) of free markets and that markets are better at allocating, well everything, but in this case credit, than any cabal of central bankers. And in a world where markets were truly free and where everyone competed on a level playing field, I am 100% in agreement with that view. Alas, I’m not sure if you noticed, but that is not the world in which we live.
If Covid taught us nothing else, it was that 40 years of globalization and creating the most efficient processes for manufacturing resulted in significant fragility in those very processes. It turns out that while economists in the US, Europe, Japan, the World Bank and IMF all explained that this was a great outcome (the US prints paper notes and gets lots of stuff for it), that only works when there is peace on earth. During this period, China chose to play by a different set of rules, explaining they were just a poor country so didn’t need to play by the G10’s rules, and massively subsidized numerous industries while essentially ignoring all environmental issues. That tilted the playing field pretty aggressively, and while President Trump has been adamant about that very issue for a decade, he was largely ridiculed, right up until Europe recently figured out that China was eating their lunch too, and now they are looking to impose tariffs on China’s excessive exports. There is an excellent Substack that comes out Sunday mornings called The Brawl Street Journal,written by an analyst in Germany. This week’s, linked here, explains that very issue extremely well.
So, I’ve set the table here, and the key to understand is the table is tilted horribly, with China getting the benefit of the doubt for almost everything.
Now, let’s consider what Mr Every’s idea would mean. Below is a chart showing current 10-year yields for Treasuries and a series of corporate bonds delineated by their credit ratings.
Data: streetstats.finance
Makes sense, less creditworthy names pay more. That is how things have always been within a market system as the worse the credit rating, the higher the perceived risk of the investor and therefore the higher yield they demand.
But what if that were to change? What if the Fed and Treasury decided that companies that manufactured products, be they semiconductors, automobiles, tractors, airplanes or flat panel screens, and mining companies that mined in the US (and Canada) and energy extraction companies that drilled in the US (and Canada) needed a lower cost of capital to be more competitive globally as those companies were the ones necessary for the US to maintain its global hegemon status. But media companies, and retailers, non-bank financial institutions and home health services companies, for example, were not deemed as critical. Perhaps the new “credit” curve might look like this instead (all hypothetical)
The point is, China has been subsidizing numerous manufacturing industries for decades with the goal of excess production designed to drive other nations’ competitors out of business and gain a strategic advantage in all those industries. It is why President Trump’s tariffs were a problem for them, and the rest of the world, as the US had been the dumping ground for much excess Chinese production in the past, and now that stuff is going elsewhere.
The world we once knew is no longer the world in which we live. Mr Every’s term, economic statecraft, is much more applicable today than any time in the past 40 years, probably longer, since the end of WWII. Statecraft implies nations will use all the power they have, economic, military and diplomatic, to achieve their desired goals. For more than 70 years, the US did not play by those rules under the assumption that if they created a level playing field, and even tilted it in favor of weaker allies, peace would reign. China doesn’t play by those rules, and that is how we have arrived where we are.
This is all hypothetical, but remember, Chairman Warsh has talked about restructuring the Fed. All the economists think he is talking about shrinking the balance sheet. But what if he is talking about completely changing credit markets with Fed support? I would argue that is not on many bingo cards.
So, briefly, let’s consider how markets would respond to this action by the ‘new’ Fed. Here are my conclusions, I would love to hear yours.
Stocks – broadly lower, although clearly favored sectors would continue to perform well. But overall leverage would shrink and that has been a huge part of this rally.
Bonds – a steeper Treasury yield curve seems certain as subsidies for those favored industries will weigh on the US budget. Meanwhile, non-favored industries would find themselves with real difficulties in terms of financing.
Commodities – offsetting forces here as industrial metals would see increased demand, and getting supply on line takes years if not a decade, but energy may result in a glut sooner as drilling takes much less time to get going. Precious metals would soar, I believe, on the basis of investors and central banks, seeking an asset with no counterpart.
FX – this is the toughest call as different nations will be impacted in very different manners. Commodity producing nations (e.g., Chile, Norway, US) should see relative strength. Consuming nations would likely suffer somewhat, although Japan and Korea, for instance, could essentially fall within the US umbrella as their key industries are the US focus.
Again, this is all hypothetical but is probably worth some thought. In the meantime, a brief tour of markets overnight after Friday’s sharp declines in the US shows nobody is very happy this morning. The tradingeconomics.com screenshot below shows futures as of 6:10am.
What sticks out to me is Italian equities are bucking the trend, although there has been no data and I cannot find a specific catalyst there. Also, it is interesting that US futures are broadly higher this morning despite growing concerns that the situation in the Gulf is going to heat up again. But Asia had a rough session and most of Europe is feeling a little pain as well.
In the bond market, after climbing on Friday, yields continue higher this morning across the board. The below Bloomberg screenshot explains things well. Recognize that Canadian and Mexican markets haven’t opened yet and Australian markets were closed last night for the King’s Birthday. But net, there is growing concern over inflation on a worldwide basis it appears.
Turning to the commodity markets, oil (+3.8%) is higher again, after falling on Friday as there were missile attacks by Iran on Israel in response for Israel’s ongoing attacks on Hezbollah in Lebanon. This situation remains fraught and frankly nobody has any idea when it will settle down into something a bit less volatile. If we look at a chart of the past six months of oil price movement, I have drawn a line at $95/bbl, which to my eye offers a pretty good estimate of the average since things began. There are still many doomsayers who believe $200/bbl oil is coming soon, but that has been their forecast since March. Something to remember about commodity markets is that they do not forecast the future, they are the prices at which physical stuff clears, so it appears that so far, there is ample inventory available.
Source: tradingeconomics.com
Not surprisingly, given the recent relationship between gold and oil, the barbarous relic is lower this morning by -0.7% while silver, though unchanged on the day, suffered dramatically on Friday, falling $6/oz or about 8%.
Finally, the dollar is little changed this morning, but that is after a sharp rally on Friday in the wake of the much better than expected NFP data (+172K with revisions higher in the previous two months of +93K) which helped push yields higher as a rate hike this year has now been priced by the futures market as per the below CME table.
But more than just the futures market is thinking that way. The below chart showing the 2-year Treasury vs. Fed Funds shows that not only have 2-year yields moved above Fed funds, but they are accelerating higher. This is seen as another harbinger of a higher Fed funds rate.
Source: tradingeconomics.com
So, the DXY is back over 100.00, USDJPY breeched 160.00, and is right on that number as I type at 6:50am, and generally, the dollar is pushing the top of its recent ranges. The one exception here is KRW (+1.6%) where the central bank and Finance Ministry both were actively jawboning the currency higher after it traded to yet another new low (dollar high).
As there is no data of note this morning, I will go through that tomorrow given how long things got today. The world is changing rapidly and the most important thing, I think, is to recognize that old relationships may no longer be valid. Nimbleness is critical, whether investing or hedging.
The crude price continues to fall But one thing that has us in thrall Is narrative doom Where pundits all fume God dammit, we’ll soon hit the wall
But under the headlines we learn It’s really not quite the concern The major details Of SPR sales Are by next year all will return
Oil puked yesterday, down nearly -6% despite the news that the EIA inventories fell dramatically as well. The total draw was just under 18 million barrels, which on the surface is a new record draw. Charts like the below were all over the place as the narrative writers were busy calling for the end of American Exceptionalism er.. the dollar, er.. US energy dominance.
However, I am not convinced that is the case. The first clue is that oil prices collapsed and if the doom porn was accurate, I don’t believe that would be happening. Instead, there is a far better explanation which I am lifting in its entirety from my friend JJ who writes market vibes and has been trading oil for as long as I have been trading FX. If you care about oil markets, you really need to be reading what he says.
The DOE is releasing 172 million barrels of SPR oil with swaps rather than outright sales. Companies borrow SPR crude now and they pay it back plus a premium in more barrels later which based on the curve could be as much as 25% more barrels. This is explicitly designed to grow the reserve by at least 200 million barrels “at no cost to the taxpayer” and it will.
These are not “draws.” They are loans. The swaps are repaid ratably from November 2026 through September 2028. Earlier return structures have lower premiums.
In other words, the administration is taking advantage of the major backwardation in the oil futures curve and selling prompt and buying forward, taking oil instead of cash at a discounted basis. If we understand this, it helps us understand why there is no panic in the oil markets, at least not in the US WTI market.
And, whether or not the IRGC is negotiating or getting ready to annihilate us all, my sense is this is a much bigger part of the picture than anyone is considering, except actual oil traders. But it is not nearly as sexy a narrative, especially if you hate President Trump and can try to tar him with yet another problem.
And as we have learned lately, as goes oil, so goes the entire market. So, it should be no surprise that equities and precious metals rallied as oil fell alongside Treasury yields and the dollar. Pretty ordinary actually.
For Jay in his last time as Chair Where soon, Kevin Warsh we’ll compare The Minutes revealed That rises in yield Would soon change to common from rare
“A majority of participants highlighted…that some policy firming would likely become appropriate if inflation were to continue to run persistently above 2%.” This statement from the FOMC Minutes of the last meeting at the end of April is actually quite galling. Even though the FOMC has settled on the inflation reading that has historically run lower than all others, Core PCE, a metric, by the way, that doesn’t even try to represent a consumer’s experience, they have singularly failed to achieve their 2.0% target for more than five years running now. In the chart below from tradingeconomics.com, the leftmost bar is at 2.2% from March 2021, right as the Covid monetary insanity started to accelerate. This chart should be Jay Powell’s epitaph, a singular failure in the seat. After all, as awful as I thought Janet Yellen was in the role, her track record was not this bad!
Of course, now that Mr Warsh is due to be sworn in tomorrow, you can be certain that the punditry will lay the entirety of blame on the fact that inflation is running hot on him directly because, well, President Trump appointed him and they generally hate President Trump. Of course, I would contend this was not really a newsworthy release as we all already knew that the FOMC had turned more hawkish, and we have seen Fed funds futures begin to price in the probability of a rate hike by the end of the year.
In the end, though, the oil price remains the key driver of all market activity for the foreseeable future. So, let’s see how the rest of the markets behaved after yesterday’s sharp decline and given that the black, sticky stuff is sliding a little further this morning, currently down -0.75% at 6:00am. Remember, too, that Monday afternoon, WTI was more than $10/bbl higher than it is right now.
Source: tradingeconomics.com
Finishing the commodity space, the metals, which all rallied yesterday, have slipped a bit despite oil’s slide this morning with gold (-0.3%), silver (-1.0%) and copper (-1.0%) all under modest pressure. I must admit that the price action in both gold and silver is starting to make me question the long-term case, let alone the short-term case, to hold them. Copper, however, seems like it will be in such demand as the electrification of everything increases, that any price declines should be snapped up.
In the equity markets, as mentioned above, yesterday saw gains in the US which were then followed up by what seemed to be a strong earnings report from Nvidia, although I read that there were those who were disappointed they didn’t guide things even higher. The follow through in Asia was mixed with Tokyo (+3.1%), Taiwan (+3.4%) and Korea (+8.4%) following the tech lead from the US. Interestingly, both China (-1.4%) and HK (-1.0%) did not follow along, but sold off, ostensibly on profit taking after their recent rallies. The other big laggard in this time zone was Indonesia (-3.5%) which reacted negatively to government export restrictions on key commodities like palm oil and metals as still-high oil prices take their toll on the economy.
As to Europe this morning, there is not much of which to speak with the major indices all +/- 0.2% or less after Flash PMI data showed weakening activity, notably in Services, although the market is still pricing two rate hikes this year by the ECB. US futures at this hour (6:35) are pointing slightly lower, with the NASDAQ (-0.6%) leading the way.
In the bond market, Treasury yields have backed up 3bps this morning after tumbling -8bps yesterday. Right now, they sit right at 4.60%. As it happens, yields fell everywhere yesterday alongside oil’s price decline, so it is no surprise that modest gains are the order of the day with German bunds (+1bp) outperforming the rest of the continent where yields are higher by 3bps to 4bps across the board.
Finally, the dollar, which had been very quiet all evening, virtually unchanged when I sat down at my desk a 90 minutes ago, is starting to rally a bit here, which explains all the movements. Apparently, there was just an announcement by Iran regarding uranium, which not surprisingly, has changed the tone of the market.
This explains the dollar’s sudden revival, higher by 0.25% across the board, oil’s sudden rebound, it is now higher by 2.5% at 6:45, and the decline in metals prices. It also neatly matches bond yields higher. So, if negotiations are struggling, we should expect to see further risk-off behavior.
On the data front, this morning brings Initial (exp 210K) and Continuing (1790K) Claims, Housing Starts (1.41M), Building Permits (1.39M), Philly Fed (+18.0) and then a little later the Flash PMI readings (Mfg 53.8, Services 51.1). But as we have just seen in the past 45 minutes, everything is still attached to oil, so that is the key to watch. All the market correlations remain intact for now, and I suspect they will continue to do so until this conflict is well and truly over. In fact, it is situations like this, where news changes market pricing so dramatically in short order, that demands hedging programs to be maintained for everyone. Let’s face it, nobody is going to get it right all the time.
So, prices were all Hot, Hot, Hot Resulting from Trump’s Iran shot But do not forget The government’s debt And spending, with what that has wrought
Meanwhile, Trump, to Beijing, has flown As both sides seek a temperate zone Where it is agreed To what both sides need And neither, the outcome, bemoan
For a change, Iran is not the lead story today in markets. Instead, there is much angst over yesterday’s CPI reading, which was hotter than forecast, and much pontificating as to what will come from the summit between Presidents Trump and Xi that starts tonight in Beijing. Let’s take inflation first.
The results showed the month-on-month readings for headline (0.6%) and core (0.4%) which translated into annual readings of 3.8% and 2.8% respectively. I always turn to The Inflation Guy™, Mike Ashton, when trying to understand CPI readings and have linked here his description of the report and things driving it, which you should all read. However, I will offer his conclusion here:
“Wrapping this up, the read is actually pretty easy. Inflation is not just in energy, but right now is fairly wide as the diffusion index shows. Some of that is related to energy…the price of diesel fuel affects trucking costs, which affects other goods prices…and some of it is related to the fact that wage growth is no longer slowing. Any way you look at it, as I said the read is pretty easy: the Fed obviously isn’t going to be tightening into an oil shock. But there is nothing here that gives them cover to ease into an oil shock either. Warsh inherits a pickle.”
I know the Fed targets Core PCE, not Core CPI, but I include the below chart of the latter to remind us all of just how far from their target the Fed has been for the past 5+ years. Powell may have bitched about political pressure, but he received none during the Biden administration and he failed dismally then too. Just sayin’.
Source: tradingeconomics.com
(One last thing I will note is that USDi, which I mentioned yesterday, will return 10.2% annualized during the month of June, on top of this month’s 12.6% return. Folks, you really should own some. You can mint it at www.usdicoin.com ).
We cannot be surprised that yields rose yesterday on the back of the CPI result with the 10-year rising a further 3bps right after the number and 4bps on the day. This takes us to a 10bp rise in the past three sessions including this morning as per the below.
Source: tradingeconomics.com
It also is the highest yield since last summer and clearly is not moving in the direction the administration would like to see. The thing is, now that we are several months into the Iran war and oil prices have been elevated since the beginning of March, we are going to see more pass through of price increases due to energy costs, at least until demand starts being destroyed. That is always the market tension, rising prices force behavioral adjustment unless the central bank accommodates those prices by increasing money supply. It is, of course, that action which helps drive generalized inflation as opposed to specific price increases. Mr Warsh, who was confirmed as a Fed governor by the Senate yesterday and faces another vote today to become Fed Chair, although I expect that will be without fireworks either, will have has work cut out for him.
Moving on to the Beijing summit, the key to remember is that summits are where things are signed amid a ceremony, they are not events to negotiate details. Secretary Bessent has been in Asia all week and he has met with Chinese Premier Le Hifeng, clearly discussing terms of what can be agreed. One would expect that the focus will be on Iran and having China press Iran to come to an agreement, trade between the nations, especially in AI related technology and rare earth elements, and Taiwan. I have no way of knowing what will be announced, but I’m confident Mr Trump wouldn’t be going if there wasn’t a deal of some sort already agreed.
So, let’s see how markets have behaved overnight. Yesterday’s US session, which started out looking pretty awful, moderated throughout the day to wind up with fairly benign outcomes. Weirdly, this led to some dramatic differences in Asia with some strong gainers (Korea +2.6%, Japan +0.85%, China +1.0%, Singapore +1.2%) and some serious laggards (Indonesia -2.0%, Taiwan -1.25%) with some lesser weakness (Australia, New Zealand, Malaysia and HK). I might argue that most investors were excited about the potential results of the summit, but if so, perhaps it implies a change in the US position regarding Taiwan, and that could well be a negative there.
In Europe, the picture is also mixed as Germany (+0.7%) is having a solid session on some solid earnings reports from the pharma sector, although France (-0.4%) is under pressure after the Unemployment Rate there jumped to 8.1%, its highest print in five years.
Source: tradingeconomics.com
Otherwise, the rest of Europe is mixed with little of note. US futures at this hour (7:30) are also mixed with DJIA (-0.25%) lagging but the other two major indices showing gains of 0.25%.
While we discussed Treasuries above, looking elsewhere around the world, yields this morning in Europe are essentially unchanged, having risen on the back of the US CPI report yesterday. However, overnight, JGBs saw yields rise 4bps on that inflation fear, and they have made yet another new 19-year high as per the below chart (dates are in European terms).
In the commodity markets this morning, oil is essentially unchanged as it is clear nobody knows how things will play out in Iran. There have been numerous commentators competing to describe just how much oil has been missing from the market and how soon (June? July? September?) the infrastructure will crash and it will be a global depression. But they keep having to push their timeline further out as the combination of more production outside the gulf plus the ingenuity of getting production there to other markets via trucks and trains, has mitigated the overall price risk. Again, here in the US, there is no risk of a shortage of any type as we continue to export our net surplus of products. I have not read about the blockade lately, but I think that speaks to the fact it must be effective because most articles wanted to describe it as a failure and not doing its job. If Iranian oil is not getting to market, their financial troubles are growing apace which is the key pressure point.
As to the metals markets, given the lack of movement in oil, it should be no surprise that gold (-0.25%) is little changed as well. However, something is changing here and that is silver (+1.0%) and copper (+2.0%) are both starting to distance themselves from the gold trade as both remain critical inputs into the electrification story. A quick look at the chart below of the two elements shows how just in the past two days, silver has broken away from gold.
Source: tradingeconomics.com
Finally, the dollar is firmer again today, continuing to ignore the many calls for its demise. But as we have seen in most other markets today, the magnitude of the movement is unimpressive. So, DXY (+0.2%) is an excellent proxy for virtually the entire FX market this morning.
On the data front, today brings PPI (exp 0.5% M/M, 4.9% Y/Y) and core (0.3% M/m, 4.3% Y/Y) although with CPI already released, I doubt it will get much interest. We also get the EIA oil inventory data which is looking for continued draws of roughly 6 million barrels across crude and products. there are Fed speakers too, but when was the last time anyone listened to anything they had to say with interest? Exactly.
It is shaping up to be a quiet session (famous last words) and I suspect all the news of note will come from Beijing tonight.
Iran has implied they will skip The coming Islamabad trip But if they don’t show The risks of war grow For them it’s high stakes gamesmanship
Meanwhile markets blithely ignore The likely resumption of war But can it be true That conflict, part two Will open the next rally’s door?
Ostensibly, a second round of peace talks are due to get underway today in Islamabad, Pakistan, but whether they will remains an open question, at least as of right now at 6:20am in NY. As always, it is difficult to know what comments are true or were even made by the players involved as propaganda remains Iran’s largest current export. I have seen comments allegedly from Iranian sources that claim they both will not attend, and that they will attend. I guess we will know before the day ends as none of the negotiators is named Schrödinger.
As well, President Trump has indicated he is uninterested in extending the cease-fire even one more day if they do not attend. At this point, it appears that the hardest line members of the IRGC that have survived are the ones in charge over there, and my take is they are not very interested in negotiating as any result would likely end their grip on power. After all, if they are prevented from having nuclear weapons capability to destroy their sworn enemies of Israel and the US, what exactly is their raison d’etre?
Thus, my fear is that fairly soon, the second stage of this conflict is going to ignite. If this is the case, the recent market insouciance over the situation seems likely to change dramatically, at least for a little while. This implies that oil prices will spike higher again along with the dollar, while equities and gold will slump. I assume bond yields, too, will rise somewhat. Looking at a chart of yields, though, the current level is right in line with where they were for much of 2025 and at the beginning of 2026, and I am left to wonder if the move lower in yields in January and February, was the anomaly, not the return to current levels.
Source: tradingeconomics.com
I remain suspect of the thesis that inflation is going to decline dramatically because of AI implementation and have felt that way since far before the war began. Over a long period of time, as AI utilization increases, I do believe it will improve productivity significantly (I see what it has done for me with just limited uses, none of which involve the wordsmithing this note!), but it is difficult for me to foresee a significant deflationary impulse absent a significant reduction of money in the system, and I don’t see that on the horizon any time soon. The point is, yields don’t seem to be wrong overall in my eyes.
Now, Kevin’s about to sit down In front of each Senate assclown They’ll ask him ‘bout rates But whate’er he states The Dems will vote no with a frown
The other noteworthy story is that Fed Chair nominee, Kevin Warsh, is having his hearings at the Senate Finance Committee today. There is a great deal of discussion in the press regarding whether he will simply be a Trump puppet, or become a Trump whisperer, or be an independent voice. As well, there has been a recent conversion from Fed chair worship amongst the mainstream media, to encouragement for FOMC dissent to anything he wants to do, simply because he was appointed by Trump, so they seek his failure. It is really quite tiresome. Frankly, whatever he says is likely to be irrelevant as we already know that every Senate democrat will vote against because…Trump, and most Senate republicans will vote for and when it comes to the floor, he will be confirmed.
That said, it is a tough job to take right now, regardless of the president, given the goals he has stated, the current situation with respect to the Fed’s monetary stance, and the potential for dramatic changes in economic outcomes because of the war. I know I wouldn’t want the job!
Ok, let’s analyze that insouciance from overnight. While yesterday started off with a negative tone, by the end of the day, US equity markets were little changed with the NASDAQ and S&P slipping just -0.25% while the DJIA was unchanged. Futures this morning are pointing higher by 0.5% at 7:20am. Overnight, Asian markets were mostly higher, some by a significant amount (Korea +2.7%, Taiwan +1.75%) which continues to baffle me given the impending energy crisis that is about to hit the region. The larger markets were also firmer (Tokyo +0.9%, HK +0.5%, China +0.2%) with the rest of the region +/- 0.3% or so. Fear is not evident here.
As to Europe, there is also no fear with Germany (+0.7%) leading the way higher despite the worst ZEW Expectations result since December 2022.
Source: tradingeconomics.com
But Spain (+0.6%), France (+0.3%) and the UK (+0.15%) are also higher this morning. Fear is not an option.
In the bond market, yields this morning are basically unchanged across the board and nobody is paying attention to this market right now. The only remotely interesting news is that Nikkei News reported the BOJ is not going to raise rates at their meeting next week, and they apparently have a 100% accurate track record in this situation. Nobody cares about this right now.
Oil (-0.2%) is hanging around awaiting the next story from the Persian Gulf and Strait of Hormuz, sitting between the level seen when it was declared the Strait was reopened and the level it touched when that was denied. As you can see from the chart below, not only has oil been hanging around, but trading volumes (the light grey bars below the price chart) also appear to be sinking. Everybody is holding their breath for the next thing here.
Source: finance.yahoo.com
Meanwhile, metals are under some pressure this morning (Au -0.7%, Ag -0.9%, Pt -0.2%, Cu 0.0%) but volumes here are also muted. It’s not just the oil market waiting for the next steps, that’s for sure.
Finally, the dollar is a bit firmer this morning, with DXY (+0.1%) pretty representative of the entire space. One outlier is NZD (+0.3%) after inflation data released last night was higher than expected and market participants started pricing in another rate hike there. But otherwise, this market is also bored and boring. There was a Bloomberg article this morning explaining that hedge funds are starting to layer in bets on a rising euro given how low implied volatility is in the options market, but the very fact that implied volatility is so low, around 6%, tells me that nobody really cares.
On the data front, Retail Sales (exp 1.4%, 1.4% ex-autos, 0.2% control group) is due. The big jump is because the data measured is nominal terms, so the dramatic jump in gasoline prices will have raised Retail Sales a lot, hence the focus on the control group that doesn’t include gas.
And that’s really it. The Warsh hearings will get headlines right up until something happens in either Pakistan from the talks, or Iran because there were no talks. There are many known unknowns right now, and that explains the lack of trading volume. But real price movement in every market will rely on unknown unknowns, which by definition are opaque, at best. Once again, my advice remains, play things close to the vest.
It has been two weeks Since she rolled the dice. Sunday It came up hard eight!
Leaders round the world Would sell their soul to obtain The Sanae lightning
Source: asia.nikkei.com
Japanese PM Takaichi scored a resounding victory yesterday, capturing more than 76% of the seats with her coalition partners, and she now commands a super-majority, enabling her to control the dialog completely, pass any legislation and even change the constitution. As I said, every other elected leader in the world pines for that type of power and approval, even Xi!
The immediate market response was a 5.0% rally in the Nikkei as expectations for an aggressive fiscal policy expansion to the economy gets priced in. Add to this more defense spending and the mooted tax cuts on food, and it is easy to understand the response.
Interestingly, the yen, which had been under pressure from fears of unfunded spending, after declining at first, reversed course and strengthened nearly 1% from its worst levels early in the Tokyo session as per the below chart. It certainly seems logical that yen weakness would be coming on this basis, but perhaps, what we are going to see is the Japanese use some of their FX reserves, which total about $1.3 trillion, to help fund the ¥5 trillion (~$32 billion) that the tax cuts will cost. That would mean selling Treasuries to sell USD and buy JPY, helping to support the yen while allowing the BOJ to leave rates on hold. In truth, it makes a lot of sense. We shall have to see how things progress from here.
Source: tradingeconomics.com
Some pundits, when looking ahead Are worried that Warsh at the Fed With Bessent, will try, To Treasury, tie Their efforts, some assets to shed
The other big story this morning is a growing concern about a potential accord between the Fed and the Treasury once Kevin Warsh is confirmed and takes his seat as Fed chair. Bloomberg has a big article on the subject, but it is around all over. When combined with another article on China recommending its banks to reduce their Treasury holdings, it has helped create a narrative that the US is going to have major fiscal problems going forward which will result in massive money printing and much higher inflation.
Of course, the thing about this that I don’t understand is that Warsh is on record, repeatedly, for saying he wants the Fed’s balance sheet to shrink, and that its expansion has been one of the major economic issues in the US since QE2 back in 2012. I also find it interesting that Warsh’s apparent desire to see the Fed’s balance sheet hold almost exclusively short-dated Treasuries, 3-years and under, is seen as a concern given that has been the Fed’s stated goal since they started shrinking the balance sheet back in April 2022.
Recall, Chairman Powell explained that in order to maintain the ample reserves framework they are currently using, the balance sheet needs to grow alongside the economy. However, this is completely at odds with Warsh’s stated beliefs that the ample reserves framework is no longer effective and needs to be replaced eventually. Of course, if I look at 10-year Treasury yields (+2bps today) over the past 5 years, as per the below chart, it is hard to get overly excited that things have changed much since the end of the Covid adjustments.
Source: tradingeconomics.com
Perhaps Chinese selling will drive yields higher, or perhaps others will sell because they are concerned that the Fed and Treasury working together is inherently bad for the economy and will lead to higher inflation but so far, that is not the case. As to inflation, while CPI and PCE remain higher than the Fed’s target, it does not appear to be galloping away at this stage. In fact, there is much discussion on X that Truflation is now running at 0.68% and that the Fed will soon need to cut rates aggressively! Of course, if inflation is running at 0.68%, can someone please explain the ‘affordability’ crisis that has gotten so much press? PS, I don’t see Truflation as being an accurate representation of the world, but it sure is good for narrative writers sometimes!
And that is how we have started the week. The Super Bowl was pretty dull overall, with defensive excellence, but nothing spectacular. Someone made the point that this was the AI Super Bowl for advertising and the last two times we saw something dominate the advertising (dot.com in 2000 and crypto in 2022), within a year, both sectors had been decimated in the equity markets. In the meantime, a quick tour of the overnight session shows the following:
Stocks – Asia was strong across the board with Japan (+3.9%) giving back some of the early gains but still rocketing to new highs. The rest of the region was similarly strong, especially Korea (+4.1%) but gains of between 1.5% and 2.0% were the norm. I guess everybody is positive on Takaichi-san! Europe, however, has not been as robust although there are mostly gains there led by Spain (+0.6%) and Germany (+0.3%). The laggard here is the UK (-0.1%) which is struggling as PM Starmer appears to be coming to the end of his disastrous term. His appointment of Ambassador to the US looks to be the final straw as Peter Mandelson is widely mentioned in the Epstein files and now Starmer has lost his chief of staff because of that. The UK will be better off, I believe, if Starmer is pushed out, although if they put in Ed Miliband, it could actually get worse given his personal insanity regarding energy. But I would buy a Starmer removal. As to US futures, at this hour (7:20), they are modestly lower, -0.15% or so.
Bonds – European sovereign yields are edging higher this morning, around 1bp across the board as there has been no data to change opinions and the bond markets, worldwide (Japan excepted) remain the dullest of places to play. Japan (+6bps) did see a response to the Takaichi victory, which is what one would have expected. We will have to watch this yield closely as if it truly does start to break out, there will be ramifications worldwide. However, if we look at the chart below of 10-year and 30-year JGBs, they remain below the peak seen several weeks ago and, surprisingly, the overnight move was more pronounced in the 10-year than the 30-year. Watch this space.
Source: tradingeconomics.com
Commodities – oil (+0.3%) has been chopping around either side of unchanged all evening as questions about Iran remain unanswered. There was a story in the WSJ about the US holding back on any military action because Iran has so many medium range ballistic missiles and any reprisal could be devastating to the Middle East overall. But if I have learned anything from observing President Trump and his negotiating style, it is impossible to know what the next move will be. I would not rule out either a successful deal or a military strike at this point, with the former resulting in lower oil prices while the latter would see a sharp rally. In the metals, gold (+0.9%) and silver (+2.7%) are both continuing their volatile rebound from last week’s sharp selloff, while copper is unchanged this morning. As I have said, nothing has changed this supply demand balance in physical metals, although the paper, futures market, can still do many remarkable things that don’t necessarily make sense.
FX – the dollar is softer across the board this morning, slipping against both G10 (EUR +0.5%, GBP +0.3%, JPY +0.4%, CHF +0.7%) and EMG (MXN and BRL +0.25%, PLN +0.65%, ZAR +0.25%, CNY +0.15%) with little in the way of data as a driver anywhere. While I have not specifically seen a reboot of the dollar is collapsing narrative, I presume the concerns over a potential Fed-Treasury accord are an underlying thesis today.
On the data front, we see both NFP and CPI this week as they come a few days late due to the short government shutdown.
Tuesday
NFIB Small Biz Optimism
99.9
Retail Sales
0.4%
-ex autos
0.3%
Employment Cost Index
0.8%
Wednesday
Nonfarm Payrolls
70K
Private Payrolls
70K
Manufacturing Payrolls
-5K
Unemployment Rate
4.4%
Average Hourly Earnings
0.3% (3.6% Y/Y)
Average Weekly Hours
34.2
Participation Rate
62.3%
Thursday
Initial Claims
218K
Continuing Claims
1850K
Existing Home Sales
4.15M
Friday
CPI
0.3% (2.5% Y/Y)
Ex food & energy
0.3% (2.5% Y/Y)
Source: tradingeconomics.com
In addition, we hear from seven more Fed speakers, with Governor Miran making three appearances as he seeks to make his case for cutting rates.
Nothing has changed my view that Warsh and Bessent are the two most important voices now, with the rest of the Fed relegated to biding their time until Warsh shows up. As to the data, the Citi surprise index continues to show that data is better than most forecasts which speaks well of the economic situation.
Source: cbonds.com
I am not a proponent of the world ending, the Treasury market collapsing or the dollar dying despite a lot of doom porn that this is the near future. I would contend the dollar remains rangebound for now, and we need a definitive policy adjustment to see that situation change. Until then…choppy is the way.
Though not getting near as much press A shutdown, once more’s, added stress To labor releases And so, we’ll miss pieces Of data. For Wall Street, a mess
But once again, I need inquire Are shutdowns a bane and hellfire? Or are they instead A way to spearhead More funding cuts we should desire?
It seems that once again, the government shut down, at least partially, on Saturday night because the Senate refuses to pass the required funding legislation. At this point, 6 of the 12 funding bills are already signed into law, so the shutdown is not as extensive. But more interestingly, it is not garnering nearly the headlines that this situation did last autumn.
In fact, I only mention it because the most direct impact we are likely to see is that, once again, the BLS will not be releasing data on time, notably today’s JOLTS Job Openings report and Friday’s NFP data. So, while Ken Griffin will miss more opportunities to make money via his HFT algorithms front running retail traders, the rest of us probably don’t care all that much.
Which brings me to the question of the size of the federal government. Stick with me here. Along these lines, I want to highlight a very interesting piece written by Michael Nicoletos which is well worth reading on the subject of naming Kevin Warsh as the next Fed chair. Prior to reading this article, I had come to the view that while Warsh would not technically be joining the Cabinet (Fed independence and all that), he is going to be working shoulder to shoulder with Treasury Secretary Bessent (they have worked together before and are close friends apparently) to achieve their goal of restructuring the way the US economy functions.
Much has been made of how it will be impossible for Warsh to cut rates (as Trump desires) while reducing the Fed’s balance sheet, which is something for which Warsh has repeatedly called. The missing piece of the puzzle, which I have rarely seen mentioned other than in this article, is regulations, specifically bank regulations. If the Fed reduces the need for banks to hold Treasuries for safety/liquidity reasons, it allows them to lend more money to the real economy which will support actual economic activity. The result can be that instead of Fed primed monetary stimulus, the nation could see business investment (consider the amount of promised inward investment to the US on the back of the trade deals) which can result in sustainable growth with less monetary support. This is a completely different framework than we have seen since, arguably, Paul Volcker, as it was Alan Greenspan who first created the Fed put. Frankly, it is the most bullish prospect I have seen in a long time. Read the article!
One other thing Warsh is keen to do is near and dear to my heart, reduce the size of the Fed and the Fed’s transparency of thought. Less press conferences, less interviews, ending forward guidance, and less Fedspeak overall would be a blessing for us all!
Ok, on to markets. Precious metals continue to be the major mover and shaker across all markets with the last several days declines being sharply reversed this morning. I think gold (+5.3%) and silver (+8.3%) deserve their own charts (from tradingeconomics.com) given the extraordinary nature of the recent price action. While the volatility here has been extreme, as I have repeatedly said throughout this move, the fundamentals have not changed, so demand for metals, especially silver into a deficient market, remains the ultimate driver.
Obviously, both metals remain far below their recent peaks, seen just last Thursday, but recall, parabolic tops always see retracements of this nature. My expectation going forward is that both these metals, and copper (+3.2%) and platinum (+6.2%) will be heading higher again, albeit not quite as quickly as we saw during January. One other thing adding to the bullishness is the announcement of Project Vault, a US stockpile of strategic minerals including copper and silver as well as a long list of rare earth elements. Remember what happens when a price insensitive buyer enters the market. You want to be long!
As to energy markets, oil (+0.35%) and NatGas (-1.2%) are both a bit less active this morning as the latter, which tumbled 25% yesterday on the end of the cold wave, is finding a new home while oil continues to soften based on the upcoming talks between the US and Iran which has reduced concerns of a military intervention there.
Compared to the commodities space, the rest of the markets are quite dull, indeed. Turning to the stock market, yesterday saw solid gains in the US after much stronger than expected ISM Manufacturing data (52.6 vs expected 48.5) which was the strongest reading since August 2022. As you can see from the below chart of this statistic, the US manufacturing sector has suffered greatly for more than 3 years, and that is true in the employment statistics there as well. Is this the beginning of the great reshoring? It is too early to tell, but if we see this for the next several months, you can be sure the narrative is going to change.
Source: tradingecommics.com
In Asia, Tokyo (+3.9% and a new all-time high) rallied on the stronger US market, the ISM data and the weaker yen supporting profitability of Japanese exporters. Korea (+6.8%) saw a huge move on the back of semiconductor makers Samsung and SK Hynix, while the government there seeks to get investors to bring money home to support the currency. India (+2.5%) rallied on the news of a trade deal with the US that reduces tariffs to 18% and gets them to stop purchasing Russian oil, buying from the US instead and generally, there were gains everywhere in the region, even Australia despite the RBA hiking their base rate (as expected) but sounding more hawkish than traders assumed.
In Europe, the picture is more mixed and far less impressive with gains and losses on the order of +/-0.2% across the board. While earnings data has been solid generally, there is ongoing concern about the outcome of Russia/Ukraine talks and a mix of data with French inflation falling to 0.3% Y/Y and Spanish Unemployment rising although the ECB, which meets Thursday is not expected to adjust policy. As to US futures, at this hour (7:10) they are higher by 0.25% or so.
In the bond market, the strong ISM data saw 10-year yields back up 4bps yesterday, and they have edged a further 1bp higher this morning. European sovereign yields are higher by 2bps across the board, as are JGB yields. It seems we may be seeing the initial pricing of stronger economic activity. However, if we take a longer-term perspective of bond yields, as per the below chart, it shows us that, frankly, while there have certainly been some ups and downs, yields are little changed overall in the past 2 ½ to 3 years on a net basis.
Source: tradingeconomics.com
As I wrote in the beginning, there are changes afoot in policy making circles, certainly in the US which drives the entire global financial markets, so it remains to be seen how this all plays out. While I think there is scope for a period of higher rates in the short term, if the administration is successful in their playbook, that would likely indicate lower yields over time.
Finally, the dollar continues to defy every call for its demise. This morning, the DXY is unchanged and back toward the middle of its trading range. The big mover overnight was AUD (+0.8%) which dragged NZD (+0.6%) along for the ride. As well, LATAM currencies (MXN +0.4%, BRL +0.4%, CLP +1.0%) continue to perform well, as they have over the past year. Of course, real interest rates in Mexico (+3.3%) and Brazil (+10.75%) are far higher than in the US and that has been drawing in a great deal of investment while CLP continues to track copper prices. Again, I am confident that President Trump is unconcerned that the dollar is declining vs. Mexico and Brazil as it helps US export competitiveness. As to the euro, remember that when it pressed 1.20, the first thing we heard was how the ECB may need to respond if the euro becomes too strong. My money is still on the next ECB move being a cut.
And that’s all there is today. Data has gone missing and I cannot believe that anybody cares what Richmond Fed president Barkin has to say at this stage of the game. That means we are back to headline bingo to drive movement. Through all this, nothing has changed my view that the dollar is still the cleanest dirty shirt in the laundry. And if Bessent and Warsh can get things done as they perceive, it will simply be the only clean shirt around.
Since Thursday, the world has adjusted Its views about what can be trusted The safety of gold Is memory-holed As retail becomes more disgusted
Perhaps we should not be surprised That China has now advertised A latent desire The yuan should move higher As status, reserve’s, emphasized
And one last thing, can it be true That markets have taken their cue From Fed Chair-select I am circumspect I guess, though, that’s what traders do
Wow! It has been a remarkable couple of trading sessions, that’s for sure. As we start this morning, precious metals remain the story, with both gold (-2.25%) and silver (-1.25%) still sliding, although both have rebounded from their worst levels of the overnight session as you can see in the chart below.
Source: tradingeconomics.com
Certainly, the debasement trade had gotten awfully crowded, but ask yourself, do you believe that people suddenly decided fiat currencies are great again? Me neither. As we have learned many times in the past, markets overshoot in both directions when something changes sentiment. Which brings me to my second question, is this really all about Kevin Warsh? If so, what a harsh introduction to his new role. I understand the idea that Warsh’s perceived hawkish bias runs contra to how the narrative had evolved, but my experience is that it is rarely a single catalyst that causes a market adjustment of the type we have just seen. The one time that comes to mind was the Plaza Accord, but at that time, the G7 nations all came out and declared they were adjusting monetary policy toward a particular goal. Assuming a new Fed chair is going to make changes of that nature seems aggressive.
Nonetheless, this is where we are. Thursday’s narratives have all been destroyed and new ones have yet to be written. So, for now, I anticipate choppy trading, although nothing has changed the underlying fundamentals for metals, the dollar or the economy, at least not yet.
Which brings me to another interesting development over the weekend. Apparently, back in 2024, Chinese President Xi Jinping made a speech to a group of provincial officials, that had heretofore not been publicized, where he declared his ambition to have the yuan become a reserve currency. This is an interesting idea, but one that I believe will be very difficult for him to achieve, at least given his apparent desire to control every aspect of the Chinese economy. After all, for other nations to hold a currency as part of their reserves, they will want complete, unfettered access to convert it at any time they desire. Otherwise, as a reserve manager, why would you even consider holding it as part of your national wealth.
One thesis is that China is going to back the CNY with gold, but I challenge that thesis. Let’s do a little thought experiment here.
China claims CNY is gold backed, so it is safer than USD which is backed only by the full faith and credit of the US government.
Saudi Arabia sells China lots of oil and gets paid in CNY
Since the Saudis can’t really do anything with their CNY, they go to the PBOC and say, here’s your CNY, give me gold.
China says
no problem, or
no way
Which do you think is more likely, a) or b)?
China claiming that CNY is backed by gold because they have bought a bunch lately is no different than the US claiming the USD is backed by gold because we hold a bigger bunch in Ft Knox. It is meaningless unless those who hold bank notes, or their digital form, can convert it. Even at the government level, and I find it difficult to believe that China will ever permit that type of transaction. But it sure makes for good headlines to offset the debasement trade debacle that just played out!
As we have observed over the past months, things do change quickly these days, so who knows what tomorrow will bring. But for now, let’s look at how the rest of the markets behaved overnight.
I’m going to start with bonds because they are the easiest. Virtually nothing has happened for weeks. Treasury yields (-1bp) have slipped slightly, as have JGB yields (-1bp) while European sovereign yields have edged higher by 1bp across the board. I would think if risk views had really changed, there would be more activity here. Perhaps the biggest surprise is JGB’s where the most recent poll for the election coming Sunday has her LDP coalition winning a landslide 300 seats. If that is the case, based on the earlier concerns of her apparent willingness to increase unfunded spending, I would have thought JGB’s would suffer. But not today.
Turning to stocks, while Friday’s US performance was lackluster, it was a virtual star relative to the metals space. As to Asia last night, it was ugly with Japan (-1.25%), China (-2.1%), HK (-2.2%) and Australia (-1.0%) all under pressure as it appears a combination of fears over changing global dynamics mixed with weakness in mining company shares after the metals rout. Korea (-5.3%) meanwhile, really took it on the chin with a sharp reversal of recent gains that had outpaced almost all other major markets. Indonesia (-4.9%) also got crushed, but then they have had problems since the threat of reduced status. India (+1.2%) was the only market gainer of note.
Europe, though, has neither tech nor mining companies of note and so is higher across the board this morning, led by Spain (+0.8%) and Germany (+0.6%) after very slightly better than expected PMI data this morning. As to US futures, at this hour (7:30) they are slightly softer with the NASDAQ (-0.5%) the laggard.
Oil (-4.75%) is backing off significantly this morning as there appears to have been a reduction in the rhetoric between President Trump and Iran, with negotiations mooted for some time this week or next, ostensibly in Turkey. Nat Gas (-17.1%) is giving back some of its recent gains as US temperatures exit the polar vortex and come back to more normal winter temps.
Finally, the dollar is doing little this morning. Friday saw a solid rebound across the board, about 1%, but today, the biggest movers are ZAR (+0.8%) which is shocking given the move in gold, MXN (+0.5%), where traders believe the Banco de Mexico is likely to be a bit more hawkish than previously thought and CNY (+0.25%) I guess on the reserve currency story. But the G10 are all little changed and the one other thing of note is that Secretary Bessent ruled out US intervention in the yen, although it remains little changed on the session near 155.00.
On the data front, as it is the first week of the month, we finish off with NFP. Here’s what else is coming:
Today
ISM Manufacturing
48.5
ISM Prices Paid
60.5
Tuesday
JOLYs Job Openings
7.1M
Economic Optimism Index
47.9
Wednesday
ADP Employment
40K
ISM Services
53.5
Thursday
Initial Claims
210K
Continuing Claims
1825K
Friday
Nonfarm Payrolls
70K
Private Payrolls
60K
Manufacturing Payrolls
-10K
Unemployment Rate
4.4%
Average Hourly Earnings
0.3% (3.6% Y/Y)
Average Weekly Hours
34..2
Participation Rate
62.3%
Michigan Sentiment
55.8
Source: tradingeconomics.com
In addition, we hear from 5 more Fed speakers, but quite frankly, I expect that the only Fed voice that is going to matter for a while is Warsh, and he is not on the slate that I can see.
We have seen a dramatic change in market mindset since Thursday, but we have not seen any change at all in policy or economics. At this point, it is clear the market was overdone (remember, trees don’t grow to the sky), but that doesn’t mean the underlying thesis was wrong. I still think that the need for commodities is substantial, and we will see prices go higher. As to the dollar, there is no indication it is about to collapse, nor would I expect it. Until such time as other nations are clamoring to own CNY, the dollar remains the only game in town. Big picture, I still like it vs. other fiat currencies.
Get ready to hear ‘bout kurtosis An idea what very few knows is In this case they’ll say Fat tails did hold sway Be careful, though, ere there’s psychosis
This definition from slideserve.com is probably the most comprehensible one that I have seen around, so thought it would be useful to understand. And below, is a chart that shows the shape of distributions of outcomes. Markets live on the blue line below.
The reason this is important was made evident on Friday given the extraordinary movement seen in markets. It is important to understand that both commodity and financial markets have always demonstrated leptokurtosis in their behavior. This means that the tails are fatter than a normal distribution’s tails. In other words, there are far more large movement events than a normal probability distribution would expect or predict. So, while I have read that Friday’s decline in gold and silver prices were anywhere between a 5SD and 12SD move (it doesn’t really matter for our purposes, just suffice it to say it was quite large), there is nothing to say it cannot happen again tomorrow. You will undoubtedly read from some that this movement shouldn’t have occurred during the life of the universe it was so statistically improbable, but that is based on a normal distribution.
Understand, too, that market makers, especially in options markets which rely on the basic math of the normal distribution, are well aware that tails are fat. It is why volatility curves in all markets have smiles or smirks, as these are an effort to take account of those fat tails. It turns out the math for fat tail distributions is incredibly complex, so traders are happy with the smile approximations.
Which brings us to the question of what really happened and why did it happen on Friday? The answer is, nobody really knows. I have seen several writeups that certainly make sense, and are likely to have been part of the process, but in markets, given the millions of variables that are part of the market process (consider how many individuals trade the stuff in addition to things like economic variables and supply/demand information for commodities), it is difficult to pinpoint an exact catalyst.
Many are pointing to the naming of Kevin Warsh as Fed Chair, on the surface a more hawkish pick than had been expected earlier in the week, although on Thursday, his Kalshi odds were already above 90%, so would seem to have been priced.
What we do know is that leverage was high and that prices were massively extended on technical indicators. Parabolic moves tend to crash in the same way they rise. Certainly, once things got going, margin calls were rampant and there was a great deal of forced selling. The chart below shows just how extensive the move was, and I highlighted the opening of the NY session.
Source: tradingeconomics.com
The great thing about moves like this are the conspiracy theories that arise as an explanation. Here’s the thing about conspiracy theories, once there are more than two people involved, it tends towards a leak.
So, what do we know? Comex futures prices when Asia opens tonight are going to be a lot lower than when they went home on Friday. But…Chinese licensing restrictions remain in place; no new silver mines have been discovered let alone gone into production; both individuals and central banks in Asia continue to buy the stuff; and the premium for physical metal in Shanghai remains steep. The fundamentals have not changed with regard to the metals themselves.
How about the financing questions? Is Warsh a hawk? My take is he is going to work hand in glove with Scott Bessent to address the economic issues in the nation. So, I would look for support (i.e. QE) for issuance, although it is entirely realistic that when (if) Warsh sits down in the chair, there will be fewer Fed fund rate cuts than might have been seen with another choice. Warsh is going to essentially join the Cabinet, as they work to implement their vision of how to overcome the debt and deficit issues.
Is this, more hawkish view, the rationale behind the moves on Friday? It probably played a role, but it is difficult to ascribe movement of that nature, especially given its self-generated response to positioning, to a single data point.
One other thing to note was that the dollar, which was set to collapse according to so many, rebounded sharply alongside the precious metals’ declines, albeit not quite as far.
Source: tradingeconomics.com
I never looked at the screens on Friday because I know that when moves like that happen, it’s easy to regret the trades you make. But the underlying thesis remains unchanged. I was not counting on the dollar’s decline to drive precious metals’ prices higher, and that relationship has broken down to a large extent anyway. It is not clear to me that having a perfect understanding of the drivers of Friday’s markets is critical. If I hearken back to Black Monday in October 1987, when the S&P 500 fell 22%, Ace Greenberg, then chairman at Bear Stearns, said it best when asked about what happened. His reply was, “Markets move, next question.”
fxpoetry 