Tag Archives: #Warsh

One Hawkish Dude

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In what cannot be a surprise
The Fed funds rate surely did rise
But look at the Dots
My read is those spots
Do not portend hikes called king-size

The funny thing is the new mood
Is Warsh is now one hawkish dude
Most pundits agree
That what we’ll now see
Is hikes of a great amplitude

But when I look at the dot plot
One more hike is all that they’ve got
Then, as time progresses
The best of their guesses
Is rates will be falling a lot

I feel very out of touch with the punditry this morning as the virtually unanimous view was that Chairman Warsh was quite hawkish in his press conference and from what I have read this morning, the Fed is embarking on a series of rate hikes to address inflation.  However, that is not what I took away from yesterday’s events.  In fact, if you look at the below chart which was published in the WSJ this morning and is truly quite helpful in showing the dot plot and the Fed funds rate next to each other and on the same scale, the median view is for one more rate hike this year and then a hold and decline going forward.

However, my view is clearly a minority one right now.  As you can see in the cmegroup.com table below, futures are pricing about a 50% probability of a hike in October and the certainty of one, plus a chance for more, by December with two more coming next year.

Again, that is far different than the dots and not what I heard, but then, I am just a poet.  So, let us turn to how markets responded to the event.  Below is a chart of both the 2yr (in green, LHS) and the 10yr (in blue, RHS) over the past 24 hours.  While both curves show a similar shape, be sure you look at the Y-axes as the increments are wider for the 2yr than the 10yr.  

Source: tradingeconomics.com

As of this morning, the 10-year is essentially unchanged while the 2yr yield has climbed about 6bps, implying the cash bond market, too, is looking for more hikes sooner rather than later.  We have discussed the logic behind hiking rates at this time, but oftentimes logic does not matter, at least not for a while.

As to equity markets, while both the DJIA and SPX closed lower yesterday, the NASDAQ was unchanged by the end of the day, as you can see from the chart below, those losses have also been recouped.

Source: tradingeconomics.com

In fact, green is this morning’s color with all of Europe and US futures all higher as I type at 6:00.

Source: tradingeconomics.com

Although, in fairness, China (-0.5%) and HK (-0.4%) didn’t have as much fun, much of Asia also was higher overnight.  It appears that the idea that central banks are set to fight inflation more aggressively, as confirmed by the Fed’s hike yesterday, has equity investors feeling better about themselves.

And that idea remains cemented in traders’ collective views as my new favorite website on the topic, rateprobability.com, continues to show plenty of hikes in the pipeline.  Interestingly, though, this morning’s BOE meeting is only showing a 24% probability as of 6:40am, 20 minutes before the release.

But now let’s turn away from the central banks and see what else is happening.  Oil prices (-1.8%) are slipping again as it appears the latest attacks on Saudi infrastructure have stopped and the Saudis claim they will have restored the bulk of the flow to Yanbu in the Red Sea within weeks.  At the same time, inventory data from the US continues to show plenty of oil around, as well as gasoline, although distillates are not as prevalent.  And of course, with oil lower, we cannot be surprised that the metals complex is higher (Au +1.25%, Ag +1.2%, Cu +1.3%).  

Finally, the dollar, after a 6-day run higher, is consolidating with the DXY now slightly above 100.00.  However, as I have been saying for quite a while, the reality is the dollar is doing very little overall, having traded both sides of 100 regularly and not trending in any direction.  

Source: tradingeconomics.com

Now, USDJPY (-0.4%) has bounced from its recent lows (yen highs) although remains below the levels of the initial intervention from the end of July as per the below chart.  And with the BOJ set to hike rates tonight, absent a massively hawkish message from Ueda-san, I think 154-156 is going to be the new home for a while.

Source: tradingeconomics.com

Looking across the rest of the currency universe, there are several moves today in line with the yen strength as ZAR (+0.55%), SEK (+0.4%), and NZD (+0.4%) are all having solid sessions with the rest of the lot +/-0.15% or less.  Again, I ascribe this more as a reaction to recent price moves than to anything new in the world.

And that’s really it in the markets this morning.  Fortunately, AI has not yet killed us all, although we continue to hear from various players that it is a civilizational threat.  The biggest problem those people have is that we have recently seen several civilizational threats that just didn’t come true, whether Covid, the reelection of Donald Trump or the strong showing by AfD in Germany.  Climate change is certainly biding its time if it is going to kill us all, and to my knowledge, CO2 is still exhaled by everyone who has informed us that CO2, if it reaches 0.045% of the atmosphere, will end life.  Perhaps that is what AI will do.  Perhaps it will take control of all the oil drilling and coal mining around the earth, expand it, combust it and drive that CO2 number up high enough to do the job!

On the data front, the UK left rates on hold, as largely expected, but I guess that means they will be hiking next time.  In the US, we get the weekly Initial (exp 208K) and Continuing (1780K) Claims data as well as Housing Starts (1.31M), Building Permits (1.41M) and Philly Fed (30.5) all at 8:30.  And that’s it.  The BOJ will be hiking rates tonight and there are no Fed speakers on the calendar today, although we will hear from Governor Michelle Bowman tomorrow morning.

The hawks are certain that Chairman Warsh has joined their club.  Personally, I think he is biding his time until the task forces report so that he can start to make the changes that are necessary at the Fed since it clearly has not done its job properly for many years.

As to the dollar, there is nothing exciting on the horizon overall, although I guess a surprise from Tokyo tonight could change a few views.

Good luck

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A Fait Accompli

Posted on by 
While everyone waits for the Fed
A story that’s come to its head
Is Canada speaking
To Europe while seeking
A road where the two can now tread

Meanwhile in the markets we see
A rate hike’s a fait accompli
But what will Warsh say
Some hours away?
Not much based on his history

I have to start with the news about the EU looking to make Canada an honorary associate member of the bloc since they all hate President Trump so much.  Now, maybe this will work out very well for them, after all, Canada is rich with natural resources and Europe is desperate for a friendly source.  But then, Europe has gone out of their way to hamstring themselves by banning fracking and new drilling for oil in the North Sea, so I wonder why they will be so happy to buy Canadian oil and gas.  Oh, and there are no effective ways to move that energy from Alberta, where most of it sits, to Europe as there is no pipeline network across Canada.  But I am certain they will make many impressive speeches on the topic and will feel really good about themselves.  It’s funny, I always thought politics was about the possible, but apparently in Europe it is more about the good feelings of moral superiority.  As the continent, writ large, is very likely going to be deficient in natural gas come January, I hope they all have warm sweaters and blankets.

Which takes us to today’s biggest story, the FOMC meeting and the interest rate decision.  The futures market is pricing a 92.5% probability of a hike and another three over the course of the next year as per the below table from cmegroup.com.

At the same time, yields continue to rise in the US across the board as you can see from the below Bloomberg screenshot, although this morning, the 10-year yield has slipped back -2bps.

There is a strong thesis that if the Fed hikes and sounds hawkish that the bond market will reverse course as investors gain comfort that the Fed is going to be addressing inflationary pressures.  Yet, I don’t understand why that would be the case since raising the Fed funds rate is not only not going to produce more oil or open the Strait of Hormuz, but it is going to make drilling for oil more expensive.  However, that is the discussion that I have seen on X as well as the WSJ this morning.

At this point, you are aware of my view that the Fed has no reason to hike, and, in fact, I fear it would be counterproductive.  It would not surprise me if the vote, whichever way it goes, winds up 7-5 as I think despite the market pricing, there is real skepticism on the committee.  We shall see later today.

And with that in mind, let’s look at how other markets are behaving this morning.  There has definitely been an air of negativity around markets lately, with much more discussion regarding the bad things that can happen rather than any potential good ones.  Whether it is the energy crisis finally arriving, or the ‘AI is going to kill us all’ story or higher rates are going to force the stock market to implode, the bears have ample opportunity to make their case.  And yet, as I type this morning, screens are green in equity markets around the world.

Source: tradingeconomics.com

So, Asia saw strength in Tokyo, Shanghai and Mumbai, Europe is seeing it across the board and US futures are all pointing slightly higher.  Too, it is important to remember that while share prices were lower yesterday in the US, it was not a rout, all three major indices were lower by about -0.5% to -0.6%.  I would not panic at this price action.

While above I noted how much US yields have moved over the course of the last month and year, the overnight movement is a touch lower, -2bps, and that is consistent with European sovereigns, all of which have seen their yields slip -1bp or -2bps this morning.  In fact, the UK (-6bps) is the outlier here after inflation data this morning was less concerning than expected.  And overnight we saw Asian bond markets, led by JGBs (-5bps) all see yields slide a bit.  

There are still many analysts and pundits who are looking at the US fiscal situation, as well as fiscal situations elsewhere in the world (all of them are bad) and calling for much higher US yields with the 10-year set to go to 6% or 7% or 10% even in the extreme cases.  But I think that is so much clickbait and not serious analysis.  Consider, for many years it was assumed that Japanese yields had to climb dramatically as the debt/GDP ratio there rose to 250% and growth was stagnant, yet they maintained that situation for more than two decades!  However bad the situation is in the US, and I’m not saying things are great fiscally, it can go on for a much longer time.

In the commodity markets, this morning oil (-2.4%) is backing off a bit but remains well above $100/bbl.  It appears that the Saudis have shut the East-West pipeline after attacks recently and that could reduce supply by 4mm bpd, a significant hit, especially for Europe and Asia.  While timing is everything in life, and the fact that drilling and setting up production takes time, nothing has changed my view that there is essentially infinite oil available around the world that will come online and replace those flows.  Consider that Venezuela is now pumping 1.2mm bpd (according to OPEC via Grok) far more than before the events last January, and far more than the pundits had said could be pumped in such a short period of time.  There is plenty of oil around, it is more a question of getting it from where it is to where it needs to be, and that infrastructure is still being built out.

As to the metals markets, with oil lower, it is no surprise they are higher (Au +1.35, Ag +1.9%, Cu +1.1%).  Certainly, as you can see in the below chart, there has been a very strong negative correlation between oil and gold over the past month, at least.

Source: tradingeconomics.com

Finally, the dollar continues to find support.  No matter how much people want to hate the dollar and explain it is going to collapse, it just won’t die.  This morning, the dollar’s gains are minimal, 0.05% to 0.15% largely across the board, but this feels more like consolidation than reversal.  I suppose traders are trying to run ahead of the FOMC news (boy if they don’t hike, I suspect the dollar really could fall sharply, but once again, I posit that no matter how bad things are in the US, they are generally worse everywhere else.

On the data front, this morning brings Retail Sales (exp 0.8%, 0.5% ex autos) and the EIA oil inventory data with a small draw expected.  Then, of course, the FOMC at 2:00 and the press conference at 2:30.  My sense is people hold their collective breath until then.

Good luck

Adf

Doom Was Misspent

Posted on by 
The 10-year yield hit Five Percent
And somehow, despite this event
The nation’s still here
And growth’s still in gear
Perhaps all that doom was misspent

It’s not to say things are all great
And many, til Wednesday will wait
To see if the Fed
And chief talking head, 
Chair Warsh, will then bless a new rate

I’m going to let pictures do much of the talking to start this morning as we are seeing significant moves across the board in various classes.  To start with government bonds, here is this morning’s view from a Bloomberg screenshot.

As you can see, yields have jumped with most nations seeing them climb around 5bps or more.  (Canada, Brazil and Mexico are not yet open, hence the lack of movement). Prior to touching, and now breaking the 5.0% level, the punditry had spilled a great deal of ink regarding how devastating this was going to be for both risk assets and for the US economy.  On the first count, if we look at equity markets around the world this morning, they were correct, selling is the name of the game as you can see in the below screenshot from tradingeconomics.com

There are not many happy equity investors this morning, although energy shares are holding their own better than most other things.  (Again, Canada and Mexico are closed.)  But as to the second point, it remains to be seen how devastating 5.0% yields on the 10-year Treasury are going to be.  And of course, we still have the FOMC meeting starting today with the policy announcement and press conference coming out tomorrow afternoon. 

But here’s the thing to remember about the equity markets, even the NASDAQ, which has had the most discussion as the tech sector has been rerating lower, is only lower by 6.3% from its all-time high seen in early June.  While nobody ever likes to see their portfolios decline in value, prices remain dramatically higher over the past several years and all three major indices are still higher by 10% or more so far in 2026.  It is hard to call the below chart of the NASDAQ bearish!

Source: tradingeconomics.com

Which, I guess, takes us to the Fed and the ongoing discussion about what they will do.  Depending on where you look, the probability priced into markets for the Fed to hike rates tomorrow is 92% (CME futures) or 100% (rateprobability.com).  Looking at the latter’s most recent chart of the six major G10 central banks, market expectations are for interest rates to rise over the next year by at least 100bps across the board.  (Australia just hiked rates last week so that was their first 25bps).

Now, I often make the case that market pricing ought to be the key feature to watch when considering a situation, but I have to admit, when it comes to the Fed funds rate, there is a bit more to the story, namely the politics involved.  

Let me start by repeating my view that I believe a rate hike would be a mistake.  While headline inflation is running above target, it remains largely an energy story, and we all understand that is outside the Fed’s control.  But if you dig deeper into the inflation statistics, things are not great, but not calamitous either.  It is ironic, if Congress were truly worried about inflation, they would cut spending to balance the budget at which point I am highly confident inflation would no longer be a concern.  Martin Armstrong (@StrongEconomics) made an excellent point this morning on X worth repeating here relative to the FOMC meeting.

As to Chairman Warsh, I think he still must be frustrated that the discussion revolves around what the FOMC is going to do but I presume he will take the information of higher yields in the back end into account regarding this decision.  Remember, too, it is not just his decision, 7 voters need to vote for a hike, and while we know there are three that believe it is proper, are there four more?  I guess we will find out tomorrow afternoon.

It’s interesting, even though oil and energy prices remain the key driver of market activity, they get remarkably little press compared to the stock and bond markets.  Sure, there are still stories about how the real energy crisis is about to come, and market pricing is certainly indicating more concern now than several months ago, but the price of Nvidia or Meta or the 10-year is the top story these days.  At any rate, oil (+1.25%) is higher this morning but has stalled just above $100/bbl for now.  Interestingly, NatGas (-0.6%) is softer and the same is true across Europe and the UK.  I find that quite interesting, especially in the latter places, as there is no indication that more supply is forthcoming.  And, not surprisingly, gold (-0.4%) and silver (-0.1%) are slightly softer with the ongoing rally in oil prices.

Finally, the dollar, which had a very strong session yesterday, is continuing to rally this morning.  it seems that even though interest rates are rising around the world, those higher rates only help the dollar.  Perhaps this is one reason that despite all the hate the dollar absorbs from a certain part of the financial community, it remains the haven of choice.  Open capital markets are worth an awful lot to international investors, and none are more open than those in the US.

Perhaps this is a good time to discuss China, a land of closed capital markets,  and what is happening there.  Last night they released some of their key economic statistics and, the idea that domestic demand is being supported is a joke.  

Source: tradingeconomics.com

It is very difficult to look at these numbers and think things are going gangbusters there.  For instance, the housing market, which has been a key destination for private savings has been declining for five years and has been negative for more than four.

Source: tradingeconomics.com

But more tellingly to me was the new regulations that were imposed starting today regarding the ability of people in China to simply leave the country on holiday.  The below tweet from journalist Melissa Chen from The Spectator is a telling sign that there is growing stress in that nation.

Again, my point is that as many problems as exist in the US, and we have plenty, it is not as though other nations are killing it.  Rather, they, too, are being killed.  Now, has this impacted the CNY?  Not at all.  It is a completely controlled currency and the PBOC is slowly driving it higher although it remains massively undervalued.  As to the rest of the FX market, the dollar is stronger by somewhere between 0.1% and 0.3% nearly across the board with only KRW (-0.9%) outside that window, but remember, the won has been flying over the past two months, so a little pullback is no surprise.

On the data front, this morning brings Empire State Manufacturing (exp 14.75) and that’s it.  It is also worth mentioning that the German ZEW Sentiment Index was released at a weaker than expected 34.7, just showing that there is a bit of despair all around the world.

I have a feeling today is going to be relatively quiet as all eyes look to the Marriner Eccles Building and Chairman Warsh tomorrow afternoon.

Good luck

Adf

Tossed to the Fates

Posted on by 
The market’s now certain this week
On Wednesday, when Warsh gets to speak
That he’ll have raised rates
And tossed to the fates
Just how much more havoc he’ll wreak

But ask yourself, what would you do
As Fed chair, midst this ballyhoo
A rate hike don’t drill
Instead, it might kill
The growth impulse we’re living through

I guess it’s a done deal, at least in the market’s collective mind, that the FOMC is going to hike rates on Wednesday.  This is according to the Fed funds futures market as you can see below.  In addition, you can see that the futures market is now pricing essentially 4 hikes over the course of the next year.

So, why the change of heart?  Apparently, the ‘hot’ CPI data from Friday combined with higher oil prices this morning has sealed the deal.  Let’s take the two in order.  Below are the reported CPI figures from Friday:

Source: tradingeconomics.com

It seems the fact that the M/M Core result was 0.3% instead of the 0.2% forecast, despite the fact that the Y/Y number was as expected at 2.4%, has been the catalyst for the increased certainty of a hike.  You may recall that Friday before the CPI release the futures market had priced in about a 60% probability of a hike, i.e., still a lot of uncertainty.  Of course, oil prices (+2.6%) are higher this morning as well after the Saudis cut movement through their East-West pipeline once it had been attacked, which has further reduced the flow of oil from the Middle East.  And certainly, if oil prices continue to rise, that will feed into inflation pretty quickly as we saw at the beginning of the summer.  

However, just for a moment, let us consider the rationale behind raising interest rates to address inflation.  The main central bank thesis is that higher interest rates will reduce demand and therefore it will reduce price pressures.  This process takes some time, the so-called long and variable lags of Fedspeak, but this is what it boils down to, reduce demand to reduce prices.  As an aside, history has shown that every economic boom has been ended by the central bank squashing it with higher interest rates.

But now let us consider the current situation.  Higher oil prices are certainly driving up some portion of the overall consumption basket, and that is responsible for the bulk of the rise in measured inflation.  Higher oil prices are also acting as a dampener of demand as money that may have gone toward other things is now being used to pay up for gasoline and diesel.  The natural result is those other things, whether goods or services, have seen demand slip somewhat and the purveyors of those things have limited ability to raise prices, at least those not getting paid directly by governments like healthcare providers.  In other words, higher oil prices are already reducing the demand that the Fed will be trying to address via a rate hike.

If the Fed decides to hike rates this week, they will be reducing demand further and could well push the economy off its current solid growth path to something less positive where companies see further reductions in demand and begin to reduce headcount.  Again, history has shown that central bank rate hikes to address energy price shocks (or really any exogenous price shocks) have been categorical mistakes.  I fear this is where we could be headed.  And the worst part is that if they hike rates, it won’t change oil prices at all. 

As a reminder, a quick look at the Atlanta Fed’s GDPNow Q3 GDP estimate shows things are looking pretty good at 4.4%.

Perhaps this discussion is the reason that I am most positive about Kevin Warsh as chairman.  I don’t know if they will hike or not this week, but the entire idea of the five task forces is to try to change the way the Fed looks at the world.  Their neo-Keynesian view has become destructive, in my mind, given the complexities that have arisen in the economy with globalization dramatically reduced and trade policies no longer moving toward free trade.  As well, the changing demographics of the US, both via an aging population and a reduction in immigration in addition to actual deportations is having a significant impact on the economy and does not appear to have been taken into account in the current Fed models.

Away from this discussion, the other main topic is AI and whether it will, indeed, kill us all, or whether it is simply a very powerful tool that if used well can enhance productivity.  Like most issues these days there doesn’t appear to be any middle ground here.  For me, I have a hard time overcoming the perspective that there is a well-orchestrated campaign now to demonize AI in an effort to get the government, at both state and federal levels, to regulate it more strictly, although I don’t know who benefits from this most so I’m not sure who is funding it.  It’s almost as though the demonization of data centers has been unable to slow the train enough, so they had to up the ante and explain AI is Skynet.

Ok, let’s see how all this new news is impacting markets.  Since commodities seem to be the primary driver right now, if we look beyond oil, we see NatGas (+2.3%) rising this morning but it remains extremely well behaved and substantially cheaper than in Europe and the UK as per the below chart from tradingeconomics.com

In fact, putting all three prices into $/MMBtu, the US is at $2.89, the UK is at ~$27.75 and the EU is at ~$27.99.  In other words, Europe and the UK are paying nearly 10X what we pay for NatGas.  They have serious problems there.  As to the precious metals, they are not that precious this morning as the negative correlation with oil continues (Au -1.3%, Ag -2.1%, Cu -1.9%).

Turning to bonds, this is the other key discussion point as 10-year yields approach 5.0% in the US.  This morning, Treasury yields are unchanged, although they have climbed 31bps in the past month.  European sovereign yields are all a touch higher with Italy (+4bps) in the worst shape but the rest of the continent seeing yields climb between 1bp and 3bps.  And JGBs, ahead of the BOJ meeting on Friday, have edged higher by 1bp.

In the equity markets, Friday’s US rally (which given all the hype on the Fed tightening seems strange, although oil prices did slide then, has been followed by a mixed picture in both Asia and Europe.  In Asia, the Nikkei (-0.8%) suffered although the broader TOPIX (+0.75%) did not.  HK (+0.5%) rallied as did some of the smaller regional markets (Australia, Singapore, Malaysia) but there was more substantial weakness amongst Korea (-3.25%) and China (-0.7%). Mixed describes it well.  in Europe, there is far more red (Italy -1.1%, Spain -0.85, France -0.7%, Germany -0.3%) than green (UK +0.7%) with the latter benefitting as oil stocks (BP and Shell) both rallied on the back of oil price rises and that has been sufficient to counter the other negativity.  As to US futures, they are all lower this morning with the NASDAQ (-1.5%), leading the way with the others lower by -0.5% or so.

Finally, the dollar is rocking this morning, with DXY (+0.4%) a pretty good indicator of things.  EUR, AUD, NZD, JPY are all lower by about that amount, as is NOK (-0.4%) despite the rise in oil prices.  SEK (-0.8%) is the G10 laggard but it has company with ZAR (-0.8%) on weaker gold prices and CE3 (PLN -0.9%, CZK -0.75%, HUF -0.8%) all demonstrating their high beta to the euro.  In LATAM, MXN (-0.6%) and CLP (-0.6%) are both under pressure on metals weakness and even KRW (-0.3%), which has been on a tear, is softer this morning.  Higher US rates and the prospect for even higher ones seems to be driving market activity.

On the data front, obviously, this week is all about the Fed, but here is the other stuff:

TuesdayEmpire State Manufacturing14.75
WednesdayRetail Sales0.9%
 -ex Autos0.6%
 FOMC Decision4.0% (current 3.75%)
 Brazil Interest Rate Decision13.75% (current 14.0%)
ThursdayInitial Claims205K
 Continuing Claims1775K
 Housing Starts1.31M
 Building Permits1.41M
 Philly Fed32.5
FridayBOJ Interest Rate Decision1.25% (current 1.00%)
 IP0.3%
 Capacity Utilization76.4%
 Leading Indicators0.1%

Source: tradingeconomics.com

So, it all comes down to, will they hike or not.  While I don’t believe it is the right thing to do, the market certainly believes that to be the case.  I wouldn’t be surprised, however, if they do hike, to see a counter reaction, like a buy the rumor, sell the news outcome, especially in the FX markets.

Good luck

Adf

Markets This Hated

Posted on by 
No matter the nation you view
Its bondholders now see to rue
Their previous buys
And under that guise
Won't buy and bonds that are new

So, yields have been rising with haste
Though currencies have not debased
But markets this hated
Have often created
Reversals, which many then chased

Global Bond Yields Surge as Oil Prices Fuel Inflation Worries

The above article in the WSJ this morning captures the current zeitgeist in markets and seeks to explain why everything has turned bad.  Certainly, the rebound in oil prices (+2.5%) is putting pressure on economies around the world, but so, too, are the unrestricted spending plans seen throughout the G10, and frankly across most of the planet.  My take is that ‘run it hot’ (RIH) has become the economic strategy around the world.  Perhaps the only outlier here is China, but even that is not really true, they are just running it hot differently.  While most governments are responsive to their peoplevoters, Xi Jinping has demonstrated time and again he doesn’t really care about that.  Rather he has his strategic goals of global domination and is pushing his economy to achieve that.

The upshot is that bond yields are rising and as you can see in the chart below, it is uniform, this is not just a US phenomenon.  In fact, much ink has spilled that 10-year JGB yields have traded to 3.0%, their highest level in 30 years.

Source: tradingeconomics.com

Now, as I said at the top, oil prices are clearly one of the pressure points as there are fears it will feed into higher inflation, thus investors are demanding higher yields.  And the other big story, which in my view is more concerning, is that governments are running increasingly larger budget deficits as the guns AND butter approach has become de rigueur in polite circles, or at least political ones.  In fact, the concern is that governments are increasingly running primary budget deficits (spending less interest payments) which is why debt loads are growing so rapidly.

Source: @KobeissiLetter

And this leads to the RIH theory.  If a country can grow its nominal GDP fast enough, then the denominator in the debt/GDP ratio will rise more quickly than the numerator thus reducing that ratio and implying a healthier fiscal outlook.  Now, nominal GDP is the sum of real GDP, the number that is reported, plus inflation and that sum can be any combination.  For instance, a nominal GDP growth of 7% could easily be 2% real GDP and 5% inflation, or vice versa.  In the RIH scenario the typical outcome is that wages rise, corporate earnings rise, stock market values rise…and prices rise.  The last point being the key political question.

Which takes us back to the bond market and a few questions I have.  First an observation.  In the old days (Greenspan era) a rule of thumb in the bond market was the 10-year yield should approximate nominal GDP growth as a stable base.  I mention that because I am confused by the bond market reaction given the near universal view of Chairman Warsh’s speech on Friday was that he was hawkish and that rate hikes were coming.  But if that is the case, and the Fed is going to more aggressively address inflation, then why are bonds selling off?  Second, regarding the debasement trade, if bonds are selling off because of concerns over massive debt issuance and the assumed result that the dollar, and all currencies, are going to lose purchasing power, why is gold (-1.4%) selling off so aggressively?  It strikes me that gold should be flying higher on the view that inflation is going to rise, but then, I’m just a poet.  I guess one could make the technical argument that it is merely correcting its recent strong rally and it remains far above its 50-day moving average as per the below chart.

Source: tradingeconomics.com

I wish I had the answers here, but I don’t.  However, something is amiss.  If the Fed was so hawkish, the bond market would not be aggressively selling off.  If the Fed was not hawkish, then the sell-off makes sense, but 90% of the punditry was wrong in their analysis of Warsh’s speech.  (My guess is they see that as a bigger problem.) One thing I do know, though, is that the bond market is quite bearish right now with nary a positive word to be found.  There is still a huge net short position in the bond futures market, as per the below chart.

Source: cotsignal.com

Here’s the thing about markets, at least in my experience.  Markets tend to seek out the ‘pain’ trade, the trade that will hurt the most participants most significantly.  As well, bull markets begin when all investors express uniform hatred of a product, like bonds right now.  Combining those two things leads me to believe that we could well be setting up for a significant bond market rally.  Just beware.

In the meantime, a quick tour of markets overnight shows negativity everywhere.  After yesterday’s declines in the US session, Asia saw mostly red numbers (Tokyo -0.15%, China -0.3%, HK -0.9%, Malaysia -1.5%, Singapore -0.8%) although Taiwan (+1.8%) and Korea (+0.25%) bucked the trend on some tech support which is also why the NASDAQ fell the least yesterday.  As to Europe, as you can see in the below screenshot from Bloomberg, it is universally red.

Lastly, US futures are under the gun this morning, down -0.5% except for the NASDAQ which is reversing yesterday’s outperformance and lower by -1.3% at this hour (7:20)

We’ve already discussed bonds, but this Bloomberg screenshot is worthwhile, I think.

Of course, the outlier here is the UK, which was closed yesterday so had a lot of catching up (down?) to do.

We’ve already discussed commodities which brings us to the dollar, which is rising despite yields rising everywhere.  Now, the DXY is at 99.60, hardly new territory although the trend over the past year is marginally higher as per the below chart.

Source: tradingeconomics.com

If we look at individual currencies, JPY (-0.2%) has seen the dollar rise back above 160 as the post intervention price action remains consistent with every previous effort.  Perhaps the most surprising outcome today is ZAR (-0.1%) which is holding up quite well despite much higher oil prices and much weaker gold prices, the two key issues in that economy.  But net, as much as people worry about the debasement of the dollar, it appears they are more worried about the debasement of other currencies more rapidly.

On the data front, this morning brings ISM Manufacturing (exp 55.2) and Prices Paid (72.0) as well as the JOLTs Job Openings report (7.3M). Fed Governor Barr speaks before the data at 9:00 this morning so I wonder if he will reaffirm the hawkish vibe, and if he does, shouldn’t that help the bond market?  I am still focused on Friday’s NFP as the next truly important piece of news, but there is an awful lot that can happen between now and then, especially with this President.

Good luck

Adf

Hike!

Posted on by 
Said Kevin, well, not really much
And pundits, their pearls, they did clutch
The haters all said
He's over his head
While others admired his touch

The hawks, meanwhile, think he said "Hike!"
And two-year yields promptly did spike
The dollar exploded
And gold just eroded
Though stocks drifted somewhat dreamlike

I must have listened to a different Kevin Warsh speech than most in the market on Friday morning, as the extreme hawkishness that seems to be the consensus outcome was completely lost on me.  Perhaps this is simply another Warshach Test.  He certainly repeated that the Fed is going to be successful at achieving their 2% target, although I clearly missed the part where he said they would be hiking in September.  But I must be the only one.  Futures traders clearly heard a hike was coming as the probability for a hike has risen to 62%, from about 32% prior to Warsh’s comments as you can see below.

In addition, a second hike in January seems highly probable and the chance of another one next summer has risen to 25%.  

Personally, I thought the most interesting, and encouraging, feature of the speech was his willingness to discuss the details of how PCE is created, a combination of 199 subcategories.  This is akin to the way my favorite inflation analyst, @inflation_guy, Mike Ashton, views the CPI data, and he has created a diffusion index to follow just how many categories are rising rapidly and how many are either falling or rising less rapidly than the overall rate.  Here is his discussion of the July data, released in August.  And here is a chart from that note (which you all should read and subscribe to as it’s free) showing his diffusion index and why inflation is not likely to subside quickly.

But clearly, the market is not interested in my spin, nor in the spin of anyone who disagrees that a hike is on the way.  The behavior of the Treasury market was quite interesting with 2yr yields jumping 12bps while 10yr yields rose 4bps and 30yr yields rose only 1bp.  This was a classic bear flattening of the curve, and it was the driver behind the dollar’s strength (+0.55%) and more impressively, the 3+% decline in the price of gold and silver.  If yields are going up, there is no reason to own gold, apparently.  That seems at odds with all last week’s talk about the resurrection of the debasement trade, but then, I’m just a poet.

One last thing.  After rereading the speech several times (talk about a boring life) my interpretation of the following comment within his Key Principles seems to be very different than the rest of the Street.  

“Fifth, short-term interest rates are the predominant tool to achieve the dual mandate. Unconventional policies to spur economic activity may suit genuine crises but should otherwise be used sparingly, if at all.”

I read this as he wants to reduce the balance sheet to reduce the Fed’s market impact and use interest rates as their policy tool and that currently, reducing the balance sheet will result in tighter policy with the same Fed funds rate.  But it appears the first part of my view, which is something Warsh has explained numerous times, is being ignored by the trading community.  Of course, it will take a change of the ‘ample reserves’ framework to get the Fed to reduce its balance sheet, and that will need the imprimatur of the balance sheet task force as well as time for the rest of the committee to get on board.

Regardless of my views, though, the market is now increasingly convinced the Fed is going to hike next month absent much weaker than expected NFP and CPI releases.

It wasn't all that long ago
When war in the Gulf ran the show
When fighting expanded
The market demanded
More havens as risk was the foe

But now, when the fighting gets hot
Most traders don't give it a thought
We're back to the Fed
And all that they've said
As key to what's sold or what's bought

Apparently, there was further military action in the Persian Gulf and the Strait of Hormuz yesterday as the US struck missile launchers on a small island there, claiming the IRGC was planning to launch more naval mines.  Iran said there will be great consequences, but the missile volleys they sent at US bases in Jordan were intercepted which prompted one of the funniest responses on X that I have seen.

Meanwhile, oil (+3.3%) prices have risen in response, but it has not generated nearly the excitement that we have seen in the past.  And I cannot help but look at the price action in oil over the past six months, since the war began, and remain unconcerned about the future.  Certainly, there has been volatility, but as I have highlighted in other markets, volatile markets are anti-fragile, and that is worth a lot.

Source: tradingeconomics.com

As to the metals markets, after Friday’s washout across the board, this morning gold is unchanged, silver (+1.7%) has rebounded more than $1/oz and copper (+0.4%) has basically recouped its much smaller decline from Friday.  Nothing has changed my view that all metals remain in uptrends.

Perhaps the most interesting reaction to the Warsh speech was the equity market on Friday, where the main indices only fell by very modest amounts.  There was no indication from that price action that there is concern about a major tightening cycle.  Turning overseas, the picture was mixed last night in Asia (Tokyo -0.15%, China +0.35%, HK -0.1%, Korea +0.5%, India -0.4%) and is mixed this morning in Europe (Germany -0.8%, France 0.0%, Spain +0.1%) with Germany the obvious outlier.  I might argue that is a response to higher-than-expected inflation readings there and concerns that it might drive the ECB tighter.  I guess if you look at the curve below from rateprobability.com it does imply slightly tighter policy over time, but that’s really at the margin.

As to US futures, at this hour (7:10) they are pointing slightly softer, -0.2% or so.

Of course, Friday was much more exciting for the bond market but this morning Treasury yields are unchanged from the Friday close.  Europe, however, has seen yields climb higher with continental sovereigns all higher by 3bps.

Finally, the dollar, which rallied sharply on Friday is giving back some of those gains with USDJPY back below 160, having closed above that level on Friday, while the bulk of the G10 currencies have gained between 0.1% and 0.2%.  The one exception here has been KRW (+0.7%) which has been on a remarkable roll over the past two months.  Between efforts to internationalize the currency and repatriation by the big semiconductor producers, the won has risen ~12% in the past two months, largely in a straight line.

Source: tradingeconomics.com

On the data front, there is nothing today but there is a big week coming culminating in NFP on Friday.

TuesdayISM Manufacturing55.2
 ISM Prices Paid72.0
 JOLTs Job Openings7.3M
WednesdayADP Employment47K
 Factory Orders0.6%
 -ex Transport0.2%
 Fed’s Beige Book 
ThursdayTrade Balance-$90.0B
 Initial Claims205K
 Continuing Claims1816K
 Nonfarm Productivity1.4%
 Unit Labor Costs1.3%
 ISM Services54.3
FridayNonfarm Payrolls58K
 Private Payrolls58K
 Manufacturing Payrolls5K
 Unemployment Rate4.1%
 Average Hourly Earnings0.3% (3.0% Y/Y)
 Average Weekly Hours34.4
 Participation Rate61.4%

Source: tradingeconomics.com

In addition to this, we hear from three Fed speakers.  The data we have seen of late indicates that the economy remains quite resilient in the face of higher energy prices.  Corporate earnings remain on fire and that continues to underpin risk assets overall.  However, all eyes will be on Friday’s NFP as that will serve to reconfirm prior opinions or perhaps change them.  The hawks will have a hard time making their case if the number is weak, and similarly, the doves if it is strong.  One little noticed thing from Friday was the NFP revisions for the 12 months from April 2025 through March 2026, which were revised lower by ‘just’ 79K.  Last year, the revision was -911K, so if nothing else, the BLS counted better!  But this begs the question, if the population is not growing, or even shrinking after all the deportations, and Baby boomers are retiring, thus reducing headcount, how many jobs are needed to maintain strong economic output?  

It makes a great deal of sense that Chairman Warsh wants to rethink the data because it does feel like the current data is outdated when it arrives, and that does not help forward looking policy decisions.  As to today’s session, it is hard to get too excited about anything right now, certainly in the FX markets.

Good luck

Adf

Monet’ry Bleating

Posted on by 
Today it is all about Kevin
And whether, bond markets, he'll leaven
But what if his talk
Does naught to unlock
His views? For bond bears t'will be heaven

Remember, the them of this meeting
Is payments, not monet'ry bleating
Well, if that's the case
There will be a race
In which, only short, are competing

Markets have remained quiet for the past several sessions as investors, traders and algorithms all turn their focus to Jackson Hole, Wyoming this morning awaiting the sage comments of Fed Chair Kevin Warsh.  The market punditry seems convinced he will lay out things like his reaction function to data and his views on where monetary policy is headed.  Of course, I think they are talking their book as they are desperate to write about that.  We know this because all they have written about lately is how awful Warsh is for not telling them all that stuff.

But I have a sneaking suspicion that any discussion of monetary policy will be fleeting, at best, as the title of the symposium is “Financial Innovation: Implications for Payments and Policy.”  Frankly, this sounds like an opportunity for Warsh to wax poetic on the future of money and stablecoins and how the Fed will deal with these new vehicles and their impact on monetary policy.  I have already discussed the idea that stablecoins are going to be inflationary in their own right, and here is an article that describes the situation better than I can.  But in this context, and with the potentially major ramifications of the US government’s embrace of stablecoins, it would not be a surprise for Chairman Warsh to essentially ignore the current interest rate structure and focus entirely on the balance sheet.

If that is the direction of his speech, I expect that the bond bears will look to double down and really hit the futures market hard, driving yields higher extending the recent move seen in the chart below.

Source: barchart.com

But I also do not rule out Secretary Bessent taking advantage of that and buying them aggressively.  Would it really be a surprise if Bessent, a former hedge fund trader who understands both bond math and the way markets work extremely well, used his ‘at least’ $4 billion of buying power to purchase futures, utilizing leverage to expand the impact significantly?  At current margin levels, that $4 billion could purchase at least $60 billion equivalent in futures or 600,000 contracts in the first week of activity alone.  I think that could drive a pretty good short squeeze, exactly what Bessent wants to see.  Below is a chart of the Commitment of Traders report for 10-year note futures showing a net short of ~915k.  What kind of impact would buying 600k futures have?

Source: cotsignal.com

My take is there would be quite a few hedge fund traders whose bonuses would be negatively impacted!

This is all speculation, obviously, but from what I have read around, the market is really looking for something I sense Warsh is not going to give them.  Prepare for more volatility ahead after several weeks of limited movement.  Just sayin’.

In the meantime, let’s run down market movements overnight, although there was not a lot of excitement.  Yesterday’s US rally was followed by broad-based, albeit not excessive, strength throughout most of Asia (Japan +0.4%, HK +0.1%, Australia +0.6%, Taiwan +0.8%) although both China (-0.4%) and Korea (-1.8%) did not partake.  Given the Nvidiphoria, Korea is a surprising outcome, but volatility in that market has been extreme as I have shown in the past.  

European bourses are also higher this morning (France +0.9%, Spain +0.5%, German +0.5%) after data showed improved business confidence throughout the continent although GDP continues to be lackluster (e.g., France 0.7% Y/Y in Q2).  But sentiment indicators are picking up there slightly and, after all, equity markets are supposed to be forward looking.  Maybe things will get better in Europe, although given their energy policies and the fact that they are behaving far more like grasshoppers than ants these days with respect to Natural gas storage (see chart below), things may get tougher if they are wrong about global warming.

As to US futures, at this hour (7:15) while NASDAQ futures are softer (-0.6%) the other two major indices are essentially unchanged ahead of Mr Warsh.

In the bond market, yields continue to creep back higher with Treasury yields (+1bp) the best performer after JGB yields (+4bps) rose overnight and European sovereign yields have climbed between 2bps and 3bps this morning.  As I highlighted yesterday, or more accurately, the WSJ did the work for me, European yields have been climbing more rapidly than US yields lately as European nations have demonstrated no ability to rein in spending, and in fact, are planning the guns AND butter approach as they build out their defense capabilities while maintaining their nanny states.  What can possibly go wrong? 🙃

In the commodity space, we continue to hear that the Strait of Hormuz is either open or closed depending on the source, although the fact that oil continues to flow has me leaning toward more open than closed.  This morning WTI (-0.6%) is slipping a bit, although it rallied a bit yesterday.  There was a very interesting article in Bloomberg yesterday regarding the shale drillers’ ability to increase production dramatically by using more surfactants (soap) to help the oil flow, gains of 20% or more in a well, which simply reminds us of the amazing technology that exists in that sector.  There is no shortage of oil folks, and likely never will be.  As to the metals markets, gold is flat this morning and silver (+1.3%) is rising again, back above $70/oz.  Copper (+0.6%), too, is having a solid session.  Nothing has changed my views on the metals going higher over time.

Finally, the dollar has been stuck in neutral as we await Chairman Warsh with the DXY still hovering right above 99.00.  We have not discussed the yen (-0.2%) much lately as it has not been noteworthy, but now that it has been one month since the major intervention, I thought it worthwhile to take a peek at the chart and see how its doing.

Source: tradingeconomcis.com

I challenge you to explain the difference to me between the price action after the last interventions and this one.  The intervention in May took about 6 weeks to unwind and the yen continued lower for another 6 weeks before they stepped in again alongside the US.  Pretty much the only thing I can see that really stops this move is if I am right about Bessent squeezing the shorts and driving yields sharply lower.  In that case, USDJPY would fall sharply without intervention.  Otherwise, it’s hard to get excited about anything in the FX markets right now.

And that’s really it for today.  At 8:30 Canadian GDP (exp 3.4%) is released and then we see Chicago PMI (57.0) and Michigan Confidence (51.0) when Warsh starts to speak.  We also get the annual NFP revision although I have not seen any estimates for that.  But as I have said all week, it’s all about Kevin.  Now we wait and see.

Good luck and good weekend

Adf

A Great Deal of Sorrow

Posted on by 
With Warsh set to speak on the morrow
The rate at which we all can borrow
Has been creeping higher
Which for some is dire
And causing a great deal of sorrow

The question is what will he say
Inflation'ry fears, to allay
Seems most want to hear
That during this year
Fed funds will rise without delay

Arguably, the biggest story this morning is that Nvidia’s earnings beat handily and Jensen’s forecasts were even more bullish.  The upshot is NASDAQ futures are rallying (+0.7%) and we saw strength in the tech sectors in equity markets overnight (Korea +1.5%, Taiwan +0.3%, China +0.9%), although it was not as euphoric as might have been expected.  I read this morning that price targets for Nvidia have been raised dramatically now, so there doesn’t seem to be any slowing of that thought process.

But otherwise, bond markets remain the focus as the combination of Secretary Bessent’s efforts to hold down long-term yields and anticipation of Fed Chair Warsh’s speech tomorrow are the main topics of conversation.  Interestingly, as much as the punditry loves to hate the US for its fiscal profligacy and the story of US yields rising has been top of mind, this morning the WSJ reminded its readers that the story in the US is not quite as bad as that in other major nations like France, Italy, the UK and Japan.  The below chart leads the story on the subject and is worth seeing.

The point is that virtually every Western nation is in the same boat and is likely to stay there for the foreseeable future.  The global regime that had been in place for upwards of 40 years; globalization leading to outsourcing manufacturing and financialization of major corporations is changing before our eyes.  Covid awakened many to the fact that the G10 had become dangerously reliant on China as a supplier for too many critical inputs which led to serious strategic concerns and weakness.  As that perceived weakness is being addressed by nations around the world, it turns out it costs a lot of money to do so, and nations are struggling to figure out how to pay for it.  Promises made when those nations could apply all their tax revenue to social causes are hard to keep when those resources are now being called upon to address strategic and security needs.  Hence the massive borrowing we have seen throughout the G10 and the corresponding rise in government bond yields.

But one of the interesting things about this process is that despite government yields rising, corporate bond yields have been quite well behaved, with credit spreads remaining near their tightest levels ever.  I saw this chart this morning which helps explain that seeming anomaly and it helped clarify my thinking.

Basically, it is explaining that US corporates during Covid refinanced their debt at the rock-bottom levels of the time and reduced their interest expense dramatically.  Meanwhile, due to arguably the single greatest fiscal policy error of all time by then Secretary Janet Yellen, the US didn’t term out its debt, instead going the other way, issuing more T-bills when yields were low, thus government interest payments, as we hear on a daily basis, have climbed dramatically. I’m still waiting for some news organization to ask her about this boneheaded decision, but I won’t hold my breath.

At any rate, the bond market story is the one currently with legs and I assume that will be true at least until Chairman Warsh speaks tomorrow.  While speeches of this nature are often quite dry, I am truly looking forward to hearing what he has to say.

In the meantime, let’s see how other markets are behaving this morning.  After yesterday’s very modest declines in the US, the rest of Asia was mixed as Tokyo (-0.25%) slid alongside HK (-0.3%), neither being a major concern.  Australia (-1.0%) was the worst performer out there after stronger Household spending data bolstered the case for an RBA hike next month raising the probability to 54%.

Europe, however, is having a tougher time this morning led by Paris (-1.1%) where concerns are rising based on both a Fitch credit review of the country (last year they were downgraded one notch to A+) as well as growing uncertainty over the presidential election next year as the main candidates describe their policies to business leaders in a debate format.  But both Spain (-0.5%) and the UK (-0.5%) are also under pressure with only Germany (+0.2%) bucking the trend after a slightly better than expected GfK Consumer Confidence reading of -26.6.  I think it is worthwhile, though, to get a better idea of the situation in Germany, and by extension all of Europe, to look at that confidence measure’s history below.

Source: tradingeconomics.com

Sure, the reading was better, but how awful must confidence be in Germany.  I guess this is the way people respond to their suicidal energy policies.

While I discussed bonds in general above, I didn’t mention the overnight movement which has seen yields continue to edge back higher led by Treasuries (+2bps) with European sovereigns right there, rising between 1bp and 2bps.

In the commodity markets, oil (+0.3%) has been trading around unchanged all night as it was slightly lower when I first sat down.  We continue to hear conflicting stories about the situation in Iran and the Gulf and whether tankers are transiting the Strait, but we have still not seen any blowout in prices.  EIA inventories yesterday showed a small net draw in gasoline and distillates, but crude remains available and Cushing inventories are being rebuilt.  As to metals, gold is flat this morning with silver (+0.6%) edging higher.  There continues to be real support for the precious metals as both grind slowly higher.

Finally, the dollar continues to languish, doing very little overall.  Despite much excitement several weeks ago about the dollar breaking out higher, the fact remains that the DXY is basically in exactly the same place it was in April 2025 as you can see below.  As I have repeatedly explained, at some point the dollar will matter again to markets, but I’m not sure what will drive that change.

Source: tradingeconomics.com

As it is Thursday, we see the weekly Initial (exp 208K) and Continuing (1790K) Claims data.  We also see the Goods Trade Balance (-$99.0B) and then some tertiary data.  Today has all the hallmarks of a sleeper as we await Chairman Warsh tomorrow.   

Good luck

Adf

Run-Of-The-Mill

Posted on by 
The funniest thing that I read
Was Bloomberg, in which someone said
That Bessent's bond buys
Have seen prices rise
So maybe, he's not a blockhead

Meanwhile, today brings PCE
Which pundits are anxious to see
If it comes out hot
They'll claim Warsh has wrought
Disaster and sip their Chablis

But if PCE remains chill
The pundits, when ink meets their quill,
Will pivot to stories
In new categories
And claim it was run-of-the-mill

As we await this morning’s PCE data (exp 0.1%, 3.6% Headline; 0.2%, 3.3% Core), as well as a bunch of other stuff like Personal Income (0.2%), Personal Spending (0.1%) and GDP (1.5%), many in the market continue to discuss the pros and cons of Treasury Secretary Bessent’s efforts to push down longer dated Treasury yields.  Before this morning, it was widely reported, or perhaps loudly reported is more accurate, that this was a desperate act and demonstrated that he didn’t know what he was doing and was simply a Trump puppet.  But the top story in Bloomberg this morning is titled “Bessent Bounce Starts to Emerge in Long Bond Market Metrics”.  In the story, they describe that despite all the controversy and certainty it would fail, it seems to be working for now.

Certainly, based on yesterday’s bond market price action, where 10-year yields slid -6bps, that may be the case.  And remember, the increased buybacks aren’t going to take place for another two weeks, so we still don’t know how much the Treasury is going to buy.  Personally, I like the idea of Treasury buying bond futures, where there is a massive speculative short position, and squeezing them all badly.  Remember, he was a hedge fund manager and knows exactly how that process works.  (As an aside, I have a feeling that Druckenmiller’s op/ed was him talking his book because he is short futures as well.)

At any rate, now that complaining about Bessent is not in tune with today’s market, the punditocracy has pivoted back to Chairman Warsh trying to anticipate what he is going to say Friday morning.  As Warsh remains tight-lipped about everything, it is much easier for the pundits to make claims without being proven instantly wrong.  And whatever Warsh says, you can be sure the pundits will claim they knew it all along!

Meanwhile, in the markets, I believe oil (-2.6% today, -5.0% in the past week) continues to slide and is back at levels seen earlier this month around $80/bbl as per the below chart. 

Source: tradingeconomics.com

I am continually amazed at the commentary regarding oil and Iran and potential peace talks as the response to virtually every statement by the Trump administration about the situation, whether about the ability to traverse the Strait, or the status of talks with Iran, is to dismiss it out of hand by many commenters on X, but when Iranian propaganda media makes claims, it is taken as gospel.  Yesterday I recall Iran claiming economic sanctions won’t matter, they are prepared, and yet today there are stories of how Iran and Oman are furiously trying to come to some type of agreement.  I do not know the situation on the ground there but after 6 months of bombardment and embargos on their oil exports, my sense is the IRGC is feeling a lot of pressure.  I guess we shall see, but in the meantime, oil inventories remain robust with no shortages seen.

As to other markets, let’s tour around to see what’s happening.  Completing the commodity group, metals are consolidating weekly gains with gold (-0.8%) and silver (-0.2%) slipping a bit although both remain higher by more than 2% this week and about 15% in the past month.  Copper is little changed.

In the bond market, after yesterday’s sharp decline in yields, where European sovereigns followed Treasuries, albeit not quite as far, this morning has seen yields back up 1bp across both the treasury and European markets.  As I have been saying, I believe this market is waiting for Chairman Warsh to speak before deciding its next move.

In the equity markets, US markets all rallied yesterday afternoon and closed near their highs with that price action following across most of Asia.  Tokyo (+0.6%), HK (+0.6%) and China (+0.85%) all had good sessions as did Korea (+1.0%) and Taiwan (+1.5%) as all those tech related markets await Nvidia’s earnings to be reported after today’s US close.  The exception here was Australia (-0.4%) which slipped after higher than forecast inflation readings were released and markets have increased the probability of a rate hike by the RBA at their September meeting to 45% from about 25% prior to the release as you can see in the chart below from rateprobability.com.

In Europe, equity markets are fairly quiet overall with modest gains of 0.2% to 0.4% everywhere except the UK which has seen a decline of -0.2%.  Ironically, despite the problems the UK is having with energy prices, two key members of the FTSE 100, Shell and BP are lower on the lower oil price and that is dragging down the index.  As to US futures, at this hour (7:40), NASDAQ (-0.5%) futures are softer, but the other major indices are little changed.

Finally, the dollar is slightly firmer this morning but continues to be an afterthought in markets.  The DXY is exactly where it was yesterday when I wrote and the only true outlier today is AUD (+0.25%) which is benefitting from higher interest rate expectations.  Otherwise, the dollar is modestly firmer against most every counterparty of note.  At some point, the dollar will get interesting again, I just don’t know when that will be.

And that is really it today.  Perhaps there will be a deal from Iran although I doubt it.  

Instead, a tribute to one of the true superstars of our time, and by all accounts one of the finest human beings ever, Ms Dolly Parton.

Good luck

Adf

A Desperate Act

Posted on by

A key market story yesterday was that the Treasury buyback operations, you know the ones that would be “at least” doubled to $4 billion per event, could grow much larger as secretary Bessent would tap the Treasury General Account (TGA) for this purpose.  Now the TGA is the federal government’s checking account.  It is where your taxes get paid into, along with the receipts from bond sales and tariffs.  It is also the account that pays all the federal government’s obligations like salaries and purchases of defense and other equipment.  The current balance (a/o Aug 21st) is about $936 billion according to the Treasury website.  Obviously, that is a huge amount of money, but then the federal government has a huge amount of payment obligations.  I bet it is a hard checking account to balance!

Now, technically, I presume that all their operations are paid by the TGA.  The mechanics would work that Treasury would issue T-bills, receive the cash in the TGA and use that cash to buy back bonds.  But the implication was that he would just spend the money that was already there.  Personally, I doubt that will be the outcome, and frankly, it almost sounded more like a threat than a future course of action.  But it did get tongues wagging.  

According to Grok, these comments came in an interview on CNBC at a bit after 9:00 yesterday morning.  The chart below shows the bond market price action from that point onward, which tells me that while there was a modest initial response, it completely disappeared until another catalyst (lower oil prices I believe) helped push yields down early this morning.

Source: tradingeconomics.com

But this clearly struck a nerve as in this morning’s WSJ, Stan Druckenmiller, Bessent’s mentor at the old Soros hedge fund, wrote an op/ed decrying the move.  As I survey all that I have learned thus far, it seems clear that Bessent is looking to remove duration from the market in an effort to drive longer dated yields lower.  But his tools are limited compared to the Fed’s abilities and, at least right now, it does not appear the Fed is going to cooperate.  The first operations aren’t scheduled until September 7th, so until then, it is all just speculation, and I’m not even going to try.

The other thing that Secretary Bessent did yesterday, that may have a larger impact on things, was announce sweeping new sanctions on Iran and countries that do any residual business with Iran in an effort to add further pressure on the regime.  It is possible, but not clear to me, that this is part of the rationale for this morning’s decline in the price of oil (-3.0%).  However, if you look at the chart of oil for the past 24 hours, it is remarkably similar to that of the 10-year Treasury above.

Source: tradingeconomics.com

Ostensibly, the news here, which of course would impact bond yields, is that the Pakistani army chief was intermediating between the US and Iran in an effort to find a solution and reduce tensions in the Gulf.  That would certainly be a welcome outcome for all, but I’m not holding my breath.  However, this price action has set the tone for risk markets this morning, so let’s take a look.

While Asia was mixed overnight (Tokyo +0.5%, China -0.3%, HK 0.0%) following the mixed US session, with pressure still evident on the tech sector, Europe is firmer this morning across the board (Germany +0.8%, Spain +0.4%, France +0.4%, UK +0.25%) with all those rallies timed almost exactly alongside the oil and bond moves.  As you can see in the chart below, the same is true in the US where futures at this hour (7:25) are also higher and moved right alongside other equity markets.  As to specific stories here, I think there is a great deal of breath holding for the Nvidia earnings report tomorrow after the close.

Source: tradingeconomics.com

In the bond market, as mentioned above, yields are lower across both Treasuries (-3bps) and all European sovereigns with the entire bloc seeing yields decline by between -3bps and -4bps.  It appears this all revolves on the same story driving oil and equities.

In the metals markets, gold (-0.2%) is edging lower but basically consolidating another strong day yesterday.  It is reasonable to conclude that market participants are growing cautious regarding US debt given there is no indication of spending restraint.  But the reality is that markets are growing cautious of all G10 debt given that statement regarding spending restraint is universally true in that bloc.  I continue to believe we are going to see governments around the world try to ‘run it hot’ with nominal GDP growth rising faster than government spending, thus reducing the real burden.  However, running it hot generally means higher inflation, and that is something that is a political problem.  As to the other metals, silver (-1.2%) is under pressure, although still far higher over the past week and month, while copper (+0.5%) is a bit firmer this morning.

Finally, the dollar is still sleeping this morning, virtually unchanged on the DXY at 99.00 and virtually unchanged vs. almost every major counterpart.  The biggest mover is INR (+0.35%) a major beneficiary of lower oil prices and not surprisingly, NOK (-0.2%) is suffering on the same catalyst.  But otherwise, everything is +/- 0.1% from yesterday’s close.

On the data front, there is not a ton this week, although PCE comes tomorrow, but really all eyes remain on Chairman Warsh’s speech Friday morning.

TodayCase-Shiller Home Prices1.7%
 New Home Sales620K
 Consumer Confidence90.2
WednesdayPCE0.1% (3.7% Y/Y)
 Core PCE0.2% )3.3% Y/Y)
 Q2 GDP1.5%
 Durable Goods0.7%
 -ex Transport0.5%
 Personal Income0.3%
 Personal Spending0.2%
ThursdayGoods Trade Balance-$99.0B
 Initial Claims208K
 Continuing Claims1811K
FridayChicago PMI57.0
 Warsh Speech 
 Michigan Sentiment51.0

Source: tradingeconomics.com

In addition, the EIA oil inventories are expected to see another build as there remains ample supply, at least so it seems.  While PCE is important, I think it will be less so given the pending Warsh comments.  To me, tomorrow’s Nvidia earnings and then Warsh are the keys for the rest of the week, absent a major change in Iran, and alas, I don’t see that.

The bond brouhaha is much ado about nothing I believe as it will not change the trajectory of Federal spending, and that is what is necessary to have a long-term impact.  Unfortunately, that usually takes a crisis, and those are unpleasant.  They also take a VERY long time to develop, after all Argentina imploded for nearly 100 years before electing Javier Milei who promised to do something about it.  It has only been 25 years here since we last ran a budget surplus.  I fear it could be much longer before things really change.

Good luck

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