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Not Existential

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The story that has the most traction
Continues to be the reaction
To stories AI
Will force firms to try
To profit from worker subtraction
 
The tech nerds see naught but potential
For robots plus, workers, essential
But history’s shown
Employment has grown
And new tech’s threat’s not existential

Block, the payments processing company announced during its earnings call that it would be laying off 4000 employees, nearly half its workforce, by the end of Q1 this year.  This was not a response to weak performance, but rather the founder, Jack Dorsey’s, belief that AI has reached the point where his company can be more effective with much fewer staff.  Of course, this is the entire AI argument compressed into a single event.

Recall Monday’s note and market response to the Citrini Research article that explained one scenario from AI adoption would be massive layoffs, a recession and a major stock market decline by 2028 as companies eliminated people from their processes.  This brought about a tremendous amount of back and forth with economists and historians explaining that every major technology creation (e.g. electricity, the automobile, the internet) was both disruptive but instrumental in expanding economic activity.  This morning’s WSJ had a nice summation by Greg Ip of the entire discussion.

It strikes me that this discussion is only beginning and we are going to hear from proponents of both sides for many months to come, although I imagine it will not be the top story every day.  As I consider the issue, I think back to John Maynard Keynes forecast in 1930 that the rapid advancement of technology would lead to a 15-hour workweek as all our needs could be met with much less effort.  Obviously, that was not his best forecast.  Rather, Jevon’s Paradox comes to mind, which states that as technology increases the efficiency with which a resource is used, the total consumption of that resource increases, it doesn’t decrease.  In this discussion, that resource is human labor.

FWIW, my view is AI is a remarkable tool for certain things but is neither sentient nor capable of breakthroughs on its own.  It is a wonderful research tool, and a wonderful computer programming tool, but as my experience taught me, people like to deal with people, not with machines, even when there are machines available to do the job.  Economic dislocation in certain areas is likely going forward, but not collapse, at least not because of greater usage of AI tools.

I highlight this because, while Block’s stock price rallied sharply in the aftermarket, up more than 20%, US futures are lower this morning by -0.5% or so as there continue to be fears about the dystopian outcome.  Remember, Nvidia had terrific earnings and the stock fell as well.  Of course, this could also be a response to the fact that the price of many equities is extremely rich on a P/E basis or a P/S basis, and we are simply seeing a little reversion to the mean.  

At any rate, as no war in Iran has begun and there have been no other changes on the geopolitical map, let’s tour markets to see how things look as we head into the weekend and month end.

Yesterday’s desultory equity performance in the US was followed by a mixed picture in Asia with the Nikkei (+0.2%) and Hang Seng (+1.0%) closing the month higher, but China (-0.3%), Korea (-1.0%) and India (-1.2%) all falling.  Malaysia (-1.4%), too, stands out for a poor session but the rest of the region was mixed with much smaller moves.  Given the tech heavy makeup of most of these nations’ bourses, I suspect that volatility will be the main feature going forward.  As to Europe, it’s a sleeper with continental bourses all +/- 0.2% or less while the UK (+0.35%) managed a modest rally after a by-election resulted in PM Starmer’s Labour party coming in 3rd place in a seat they have held for 100 years.  This appears to be adding pressure on Starmer to do something, or on Labour to remove him, but a key concern is they will move further left, something which I doubt will help the UK economy or stock market.

Turning to the bond market, yields are declining all around the world with Treasuries slipping -5bps yesterday and another -2bps this morning, now below the 4.00% level.  In fact, a look at the chart below shows a pretty strong trend lower in yields.

Source: tradingeconomics.com

But we saw European sovereign yields slide yesterday and continue lower by another -1bp to -2bps this morning and last night, JGB yields fell -4bps and showing a very similar trend to Treasury yields as per the below.  It seems that concerns over too much debt issuance driving yields higher have been put on the back burner for now.

Source: tradingeconomics.com

In the commodity space, it appears that Iran fears are making a comeback as oil (+2.1%) has rebounded sharply from the levels seen in the wake of the massive inventory build I described yesterday morning. It sure looks like somebody bought a lot of oil yesterday morning at around 9:45am, although I have no guess as to who it would have been.

Source: tradingeconomics.com

Interestingly, the news from Geneva is that the talks are going to continue next week, so while both sides are disputing the other’s version of things, the fact they are still speaking is a huge positive.  I fear given the military buildup, some type of action will occur, but we can be hopeful. 

Meanwhile, in the metals space, gold (+0.1%) is little changed for the past several sessions, consolidating just below the $5200/oz level.  Whatever the narrative may be here, regarding central bank buying and the end of the dollar system, this tells me that the market is tired and needs some R&R before moving forward.  I remain bullish, but not today.

Source: tradingeconmics.com

Silver (+1.7%) is showing very similar price action to gold, albeit with a bit more daily volatility.  The story here about a short squeeze for COMEX delivery is fading from the FinTwit feeds, but the structure remains not enough of the stuff for industrial usage going forward.

Finally, the dollar, this morning is, net, doing very little.  But there are two stories to note.  The first is CNY (-0.2%) where the PBOC changed its risk reserve rules for foreign exchange holdings for Chinese banks, reducing the required reserve to 0% from 20%.  In practice, this means that Chinese banks can run forward positions without a capital charge and allows them to be more competitive pricing forward sales of CNY for local hedging counterparts.  Obviously, this is a huge adjustment and speaks to the fact that they must be getting a bit uncomfortable with the speed with which the renminbi has been rising over recent months.  Ironically, there was a Bloomberg article highlighting how options traders were paying up for 6.50 CNY calls/USD puts anticipating further CNY strength.  Perhaps the PBOC didn’t like that!

The other story is from Hong Kong, where the currency is usually not an issue as it is pegged in a very tight band to the USD, allowed to trade between 7.75 and 7.85.  The HKMA (HK’s central bank) is committed to buying and selling HKD as necessary to maintain that band.  This has been a key feature of Hong Kong’s financial attractiveness for the past decades.  The way this operates is there is an exchange fund that is designed to be used only for FX intervention, and it has ~HKD 4 trillion in balances (~$510 billion) which, given their GDP is only $400 billion or so, seems like plenty.  Well, as always seems to be the case, the government there is proposing taking some of that money to use for financing a government project, a technology hub being built, and since they don’t want to raise taxes, they thought raiding that fund would be the answer.  The concern is the precedent it sets as if that goes through, what is the next project that will be determined to need the funding.  If we know one thing about governments it is that if they find a pot of money they can tap to spend more without raising taxes, they are going to do it!  The amount in question is a small fraction, just $19 billion, so would not likely impact the HKD peg.  But this is something to watch as it will not be a positive if we see this a second time.

Otherwise, NOK (+0.5%) is gaining on oil’s gains while KRW (-0.5%) is slipping on the equity market decline and foreign sales.  Beyond that, nothing.

On the data front, this morning brings headline PPI (exp 0.3%,2.6% Y/Y) and core (0.3%, 3.0% Y/Y) as well as Chicago PMI (52.8).  Regarding the last, a look at the chart below shows that last month’s reading was the highest since November 2023 and is arguably a good sign that we are seeing increased industrial activity in the middle of the country.  Recall, the Chicago number is often seen as a precursor for the economy as a whole.

Source: tradingeconomics.com

And that’s it.  Given equity market performance this month has been flat to slightly negative, it seems unlikely there will be large rebalancing flows.  I continue to look for quiet markets although the trend in bonds does seem like it is building up some steam.

Good luck

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No-Holds Barred

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The rumor is Madame Lagarde
Who, through her incompetence, scarred
The ECB, now
Is set to, out, bow
To run for French Prez, no-holds barred
 
The fear that this move does display
Is Madame LePen’s making hay
So, globalists now
Will hardly allow
Their efforts to just go away

We continue to trade in recent ranges across most products in financial markets as investors and traders seek the next catalyst for secular movement.  Even precious metals, which have shown the most volatility of any sector, are now developing a new range as per the chart below.

Source: tradingeconomics.com

Now, I will grant the range in gold (+0.7%) is wider than many other products, but the chart clearly looks, at least to me, like an ongoing consolidation awaiting the next big thing.  As to other products, I have shown bonds, the dollar and even stocks doing the same thing lately, consolidating, and as of this morning, none of them are breaking out in either direction.  (As an aside, there is still a very loud group claiming the dollar is about to collapse, but thus far, their views have been unrequited). In fact, if we use the DXY as today’s dollar proxy, we appear to be heading back to the middle of the range rather than breaking lower.

Source: tradingeconomics.com

Net, there is not much to discuss in the markets which leads me to the most interesting topic, what will be the catalyst to break these ranges?  Historically, there are two types of things that act as a market catalyst, a change in the data trajectory or a geopolitical shift.  Right now, the former does not appear to be in the cards.  We know this because there are vocal proponents of both substantial economic strength and economic weakness in the future.  The lesson from this is that the data remains quite mixed, with some areas of the economy performing well, while others are struggling, but not enough on either side to expect a major trend.  

For instance, in the US, recent data showed relative employment market strength while inflation data continues to compress.  Now, you can quibble with the construction of both data sets, and there are many valid concerns, but for policymakers, especially those steeped in the view that strong growth necessarily drives inflation higher and vice versa, the current data set does not argue for any policy shift.  

Arguably the biggest geopolitical change of late was the dramatic Takaichi-san victory in Japan, which has enabled her to impose her will on the economy.  As such, we can expect more ‘run it hot’ actions there.  However, thus far, the JGB market has not rebelled against further unfunded government spending.  We are one month, and 20bps, removed from the recent peak in yields.  We shall see how long that lasts and if, a change in that view impacts bond markets elsewhere in the world, but as you can see below, it does not look that scary right now.

Source: tradingeconomics.com

But otherwise, Russia/Ukraine continues apace with negotiations going nowhere and the US/Iran talks, with articles this morning claim progress is being made there.  Arguably, some type of deal with Iran ought to be bearish oil as it would seemingly involve the lifting of sanctions on their oil sales, but who knows.

Which takes us to the most interesting headline this morning (see Bloomberg’s headline below), the story that Madame Lagarde is rumored to be stepping down as ECB president before her term expires next year.  While, naturally, she has denied the story, there is certainly enough palace intrigue to dig a little deeper.

Ask yourself why, a woman who has spent her career striving to reach the pinnacle of geopolitics, would willingly give up a role at the top.  While the initial punditry stories indicate she wants to allow President Macron to be involved in the discussions as to her replacement (if she serves out her term, he will be gone and they fear Marine LePen on the right will be able to influence the next decision), Occam’s Razor tells me it is far more likely she is going to prepare to run for president of France herself.  After all, did she not just see her erstwhile colleague, Mark Carney, be elected PM of Canada?  And as powerful as major central bank president is, it pales in comparison to national president.  Added to her impetus was the resounding Takaichi victory, demonstrating that a woman can be elected in the CEO role, and I must believe, this is her motivation.

If you are of a globalist mindset, Christine Lagarde is the perfect French president, completely beholden to your ideals, and yet, as a woman, believed to be able to work effectively with others (notably President Trump) in order to prevent further damage to your goals.  Mark my words, she will step down and announce her candidacy before the summer. Funnily enough, I expect if she leaves, it will be a benefit for the euro!

Ok, the briefest of turns around markets shows that Asian equities followed yesterday’s US market rally higher, at least those that were open, with New Zealand (+1.5%) leading the way after the RBNZ left rates on hold, as expected, but came across as more dovish than expected.  Otherwise, Tokyo (+1.0%) and Australia (+0.5%) were the next best gainers with the former responding to the news that the first major Japanese investment into the US was announced, a $36 billion set of deals including a massive NatGas power project in Ohio.

European bourses (DAX +0.85%, CAC +0.55%, IBEX +1.25%) are also higher, rising on hopes that the announced increases in defense spending will be spent at home and boost European companies across the continent.  As to the UK (+1.0%), softer inflation readings this morning have raised hopes that the BOE will be more aggressive easing policy soon.  US futures are higher by about 0.5% this morning as it seems many of the fears about overinvestment in AI have suddenly waned.

Bond yields, which have fallen steadily over the past several weeks have all backed up 1bp, in the US, Europe and Japan.  Overall, nothing really to mention here.

In the commodity markets, oil (+2.9%) just jumped after the Russia/Ukraine peace talks broke up abruptly after just 2 hours.  Fears of more strikes on Russian infrastructure have risen.

Source: tradingeconomics.com

As to the metals, after yesterday’s declines, this morning they are all bouncing (Au +0.9%, Ag +2.8%, Cu +1.2%, Pt +1.6%) as they continue to consolidate.

Finally, the FX markets are showing very modest net USD strength with NZD (-0.7%) the laggard after the RBNZ while NOK (+0.7%) is the leader, jumping right after the oil news.  Otherwise, +/- 0.15% is the order of the day.

On the data front, we get some second-tier information as follows: Durable Goods (exp -2.0%, +0.3% ex transport), Housing Starts (1.33M), Building Permits (1.40M), IP (0.4%) and Capacity Utilization (76.5%).  (An interesting tidbit regarding Capacity is that I read China’s Capacity Utilization is just 74.3%.  Based on their trade balance, I would have expected a much higher number.  It tells me that over (mal?) investment there is even greater than I thought.). 

Too, we hear from Fed Governor Michelle Bowman and get the FOMC Minutes at 2:00.  Yesterday, Governor Barr said there was no reason to adjust policy for the reasons I stated above, nothing is clear, and I suspect Ms Bowman will be similarly inclined.

It is hard to get excited in today’s market, that’s for sure.  In fact, I expect we will need to see something pretty dramatic to drive a break of these ranges, and I have no idea what that will be.  Play it close to the vest for now.

Good luck

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