By Benjamin Picton, senior strategist at Rabobank

US non-farm payrolls underwhelmed on Friday, and it is clear that inflation is now defeated. Well, not really. But you wouldn’t know it from the way the bond market reacted to the figures. The US 10-year treasury yield gave up 14bps after official figures showed that employment rose by *only* 187,000 in July. The market was looking for a gain of 200,000, so it was a slight miss for the month. The source of much of the optimism seems to be downward revisions for employment in June and May, but even with those revisions employment is still growing faster than the labor force. Consequently, the unemployment rate ticked lower to 3.5% and growth in average hourly earnings held at 4.4%. Conclusive?

Bond market jubilation wasn’t completely contained to the long end. There wasn’t much movement in the implied probability of a further rate hike in the Fed Funds futures, but the implied rate as at December next year fell by about 10bps. The bond market seems to be suggesting that the jobs figures point to a faster economic slowdown and more active easing cycle from the Fed in an attempt to pilot the economy into a beautiful soft landing, rather than ending up as a dark smudge on the tarmac.

While the bond market went Pollyanna on Friday, equities read things differently. The S&P500 was off by more than half a percentage point and the NASDAQ down by more than a third of a percentage point (with tech stock valuations no doubt supported by falling bond yields). The Dow Jones has now fallen for three straight sessions after setting a new record for most consecutive up days between July 10th and 26th (13 in a row). “Sell in May and go away” appears to have been bad advice this year, but are we now at the beginning of an overdue correction in equity markets? A cursory check of the total assets on the Fed’s balance sheet show that we are now back below the levels reached in early March, before the collapse of SVB, Signature Bank and First Republic necessitated another one of those ‘mid-course corrections’ whereby balance sheet reduction was put into hard reverse.

Between July and September the US Treasury is expecting to cram more new issuance into the market than was previously suggested. Lower tax receipts, higher outlays and the effects of the debt ceiling negotiations earlier in the year on delaying new issuance seems to have created a bulge in the debt marketing pipeline. While the Treasury is mopping up cash, the Fed has also swung from being a net buyer of debt to a net seller, suggesting that securities will be more plentiful and cash more scarce. This, combined with the perception that we are nearing the end of the Fed hiking cycle is a likely driver for the bear steepening that we have seen since the end of June.

P/E ratios on the S&P500 are above 20x at the moment. So, as they say on Twitter: “whomst equity risk?” With valuations that high, and dividend yields running at a piddling 1.54%, it seems hard to get bulled-up on equity beta from here. That may be why we are seeing average 1-day price moves following earnings releases showing negative for every sector except materials and financials despite broadly strong bottom-line growth. So, is this as good as it gets for equities? Or does the prospect of an impending easing cycle from central banks present enough of a carrot to keep equities bid as a relative value play versus bonds?

Developments in commodity markets are even more interesting. My colleague Teeuwe Mevissen covered Belarussian incursions into Polish airspace and Russian rocket attacks on Ukrainian grain facilities close to the Romanian border last week. This morning we are seeing CBOT wheat futures up more than 11USc/bu following reports of a Ukrainian drone strikes on a Russian warship and oil tanker in the Black Sea over the weekend. The situation is developing into a tit-for-tat as Ukraine seeks to cripple Russia’s capacity to fund its war effort through commodity exports.

Understandably, the world’s gaze is fixed on the situation in Ukraine, but this isn’t the only flashpoint for commodities. Last Tuesday we wrote about the coup in Niger impacting upon the supply of uranium to the French nuclear industry. Niger supplies 25% of Europe’s uranium, and signs that the military junta is cosying up to Wagner Group potentially puts close to 60% of the world’s mined uranium under the influence of the Kremlin. Even more concerningly, Russia itself dominates the market for uranium enrichment, while the West has allowed its own capabilities in this area to wither on the vine via comforting delusions of the End of History. Clearly there are many risks here, with potentially severe implications for energy security and decarbonisation efforts.

The United States is alive to these risks, but has perhaps been too slow off the mark in addressing them and in convincing her allies to do the same The Associated Press reported over the weekend that the US is considering stationing military personnel on commercial ships traversing the Strait of Hormuz to deter Iranian seizures of tanker vessels. This would be an unprecedented move aimed at ensuring the integrity of 20% of the world’s oil trade, which flows through the region. Again, Western Europe has the most to lose here.

So, yields are down for the time being but you can’t print grain, or oil, or uranium, so risks of further supply shocks remain. For the time being though, happy days are here again!

Bill Ackman is not alone…

Hedge funds ramped up their bearish Treasuries bets to another new record last week (before yields plunged on Friday after the ‘goldilocks’ jobs data).

The aggregate Treasury Bond futures position pushed to a new record short across the whole curve…

Source: Bloomberg

Right before yields puked Friday…

But, as Bloomberg notes, there is a big divergence between hedgies and traditional investors.

Leveraged fund increased net-short positions of longer-maturity Treasuries derivatives to the most since figures going back to 2010, according to an aggregate of Commodity Futures Trading Commission data for the week to Aug. 1.

Asset managers took opposite bets, taking their own net-bullish positions to an all-time high.

Additionally, Call Open Interest in TLT (the long-dated Treasury Bond ETF) is at a record high relative to Put Open Interest, adding to the bullish bond bias among more traditional investors…

We previously explained why the hedge fund Treasury short position could well be more related to the ‘basis’ trade which has seen a renaissance of late.

The strategy, which imploded spectacularly in 2020, has become popular once more as speculators seek to profit from small differences in the price between cash Treasuries and corresponding futures.

“Short positions in these few years seem to be largely due to the futures basis trade,” said Naokazu Koshimizu, senior rates strategist at Nomura Securities Co. in Tokyo.

The selling may continue “unless there is a huge disruption in the Treasury market which deteriorates the basis trade.”

Additionally, as we highlighted earlier, stronger-than-expected data probably means higher yields in a market more acutely alert to inflation (and therefore supply) risks. As with last week, term premium would likely drive the move, meaning a curve steepening. After relentlessly flattening for the last two years, the pain trade is for a steeper curve. Implicit positioning of speculators from the COT report shows there is a heavy skew to a flatter curve.

The negative carry for most flatteners remains punitive (for 2s10s USTs it’s ~83bps over a year), but the large upside potential from supply/inflation worries and the covering of positions begins to make that look less insurmountable.

Speculative investors weren’t confined to just shorting longer-dated paper, also boosting five-year short futures positions to an all-time high, the CFTC data showed.

Which is interesting because JPMorgan’s FICC traders have just recommended a tactical long in the the 5-Year TSY…

Outright yields are back at levels observed briefly last fall, and sustainably in 2011, and intermediates appear fairly valued after controlling for the market’s near-term Fed policy expectations, as well as medium-term inflation and growth expectations: we recommend tactical longs in 5-year Treasuries

There’s been a wide-ranging discussion in recent days on the drivers of this vicious sell-off in recent days, and we think it’s worth digging in further.

First, we think the downgrade has played a limited role as we see limited impact for ratings on yield levels.

Notably, various fiscal metrics of the US are closer to that of other AA-rated sovereigns than AAA-rated sovereigns, though the dynamics of the economy and its reserve currency status afford the US more leniency than other issuers. Arguably, this backdrop made the downgrade less surprising than S&Ps’ shocking actions in August of 2011, producing a smaller reaction. Moreover, we’ve shown that each 1-notch downgrade by a single ratings Agency should narrow 5-year swap spreads by about 2.8bp. Certainly, swap spreads did narrow by a magnitude consistent with the downgrade the day after the downgrade, but completely reversed course over the remainder of the week.

Second, there is some question on whether Treasury’s larger-than-expected financing estimates and quarterly refunding announcement could have been a catalyst.

To an extent, an ongoing series of increases to coupon auction sizes could pressure yields higher, particularly when the Treasury market is transitioning from the support of price insensitive buyers to more price sensitive sources of demand. However, Wednesday’s announcement was just $1bn/month larger than our own estimates, which had already forecast a 30% increase in duration supply in 2024. We do think supply is a catalyst for this sell-off, but cannot fully explain the moves of the last few days.

Indeed, the yield curve has shown reduced sensitivity to changes in duration supply in recent years: Figure 61 shows the partial T-stat for the 5s/30s curve with respect to 1y1y OIS rates (as a proxy for Fed policy expectations), 5y5y TIPS breakevens (as a proxy for inflation expectations), the Fed’s share of the Treasury market, and the 3-month look ahead in Treasury duration supply (we bring realized duration supply data three months forward, as Treasury is well known for being regular and predictable, communicating changes in auction sizes well in advance of actual delivery).

Looking at these factors, market-based Fed expectations and the Fed’s share of the Treasury market have the largest t-stats, indicating these factors have been the most statistically significant drivers of the curve slope. They are both highly negative, indicating that the curve tends to steepen as OIS forward rates fall, and as the Fed’s share of the Treasury market declines. Meanwhile, the signs of both the inflation expectations and duration supply factors are positive, indicating the curve tends to steepen as TIPS breakevens widen and as duration supply increases on a forward basis. However, these t-states are very close to zero, indicating limited significance over the last two years. Thus, we are not sure increased Treasury duration expectations were an ongoing driver of the steepening this week.

Third, we think valuations have played a significant role as well.

As we’ve highlighted for the better part of the last three months, intermediate Treasuries have displayed some sort of market’s near-term Fed policy expectations, as well as medium-term growth and inflation expectations. With these latest moves, Treasuries have fully mean reverted, and are now trading in line with their fundamental drivers, after trading rich for the last number of months (Figure 62).

Fourth, we think this mean reversion has been particularly powerful because investor positioning has played a role as well.

Our latest Treasury Client Survey (taken Monday) stood near its longest levels of the past decade as investors add duration into the end of the Fed tightening cycle.

This matters because we have found that when investor positions deviate sharply from average levels, they portend a reversal in yields.

It’s likely with the moves we’ve had this week that positioning is more neutral, but with the Fed likely on pause for an extended period, we are not sure the exposure to lower yields has been fully unwound.

And so, as JPMorgan concludes, net of these factors, with nominal yields near their highest levels of the current cycle, and valuations modestly cheap, it is becoming more compelling to add duration.

We think the data flow next week also support lower yields, as we forecast core CPI rose 0.17% in July, and 4.7% oya, the lowest run rate since October 2021, driven by further moderation in shelter pricing, airfares, and used vehicle prices.

Given the combination of these factors, we recommend tactical longs in 5-year Treasuries.

Pro subs can read the full note here…

Authored by Prashant Jha via CoinTelegraph.com,

American financial technology company PayPal launched a new crypto stablecoin called PayPal USD (PYUSD) on Aug. 7. 

The new US dollar-backed stablecoin will be issued by Paxos Trust Co. and fully backed by United States dollar deposits, short-term Treasuries and similar cash equivalents.

The new stablecoin is built on Ethereum and is “designed for digital payments and Web3.”

The firm said that the new stablecoin will be available soon to United States customers.

PayPal USD compatibility with crypto exchanges, WEb3 apps and crypto wallets. Source: PayPal

PYUSD will be redeemable for the U.S. dollar at all times and it can also be exchanged for other cryptocurrencies on PayPal. The payment processor claimed that the new stablecoin will soon be available as a mode of payment for various purchases and will be transferable between PayPal and Venmo.

The launch of a stablecoin could push the company’s bid to become a crypto payment giant, a contention that the company started in 2020 after making way for crypto payments on the platform.

PayPal boasts over 350 million active users and already lets users in the U.S. and the United Kingdom buy, sell and hold Bitcoin (BTC), Ether (ETH), Bitcoin Cash (BCH) and Litecoin while enabling payments in these crypto assets. 

PayPal CEO Dan Schulman hopes the new stablecoin would become a part of the overall payments infrastructure. The company first confirmed its plan to launch a crypto stablecoin in January 2022 claiming it would develop a stablecoin while working closely with relevant regulators.

While there are multiple stablecoins available in the crypto market, PayPal will be the first launched by a payment processing giant. Paxos CEO Charles Cascarilla told Cointelegraph:

“With the launch of the first stablecoin by a leading financial institution, PayPal and Paxos are proving the real-world value of blockchain technology. PayPal USD is the most significant leap forward for digital assets and the financial industry and Paxos is proud to enable this transformative product.”

The firm claimed that the regulatory environment around stablecoin in the U.S. is gradually “progressing toward more clarity” and thus there is a a demand for an alternate stablecoin from what is currently available in the market.

[ZH: However, bear in mind that PayPal is facing pressure from UK regulators over its ‘debanking’ efforts, seeking free-speech assurances before granting a full license to the FinTech company.]

It has until December to get approval from the Financial Conduct Authority (FCA) for a full licence but has become embroiled in the de-banking scandal after several groups claimed their accounts were shut suddenly.

The U.S. payments company was last year accused of shutting down accounts for political motives after temporarily closing the accounts of UsForThem, the parents’ group that fought to keep schools open during the pandemic, as well as the Free Speech Union and its founder Toby Young without any clear explanation.

It later reinstated the accounts following a backlash from MPs.

The crypto stablecoin market has a $126 billion circulating supply dominated by Tether-issued USDT with a $86.5 billion market cap followed by Circle issued USD Coin (USDC) with $26 billion market cap and a few others.

However, a majority of these stablecoins have faced regulatory hurdles in the U.S. lately.

The policymakers in the U.S. are currently discussing a stablecoin bill with a bipartisan approach.

It has been a tough year for Goldman’s commodity team, which after a stellar 2021 and 2022, has seen its “supercycle” call crash and burn in a year where copper plunged, metals tumbled and oil dropped as low as the mid-60s. And with the bonus basket accruals for the full year looking rather dismal, the exodus – which started in March when the bank’s closely followed commodity strategist Damien Courvalin quit to go to Balyasny as a chief commodities strategist – culminated earlier today when we learned that Goldman’s iconic head of commodity strategy, Jeff Currie, whose mostly bullish pronouncements made him one of the bank’s most visible talking heads, is leaving Goldman Sachs after three decades with the bank.

As Bloomberg notes, Currie – who had been the face of the Wall Street titan’s commodities research for nearly 30 years, “commanded attention in that market with a willingness to stick his neck out on calls, with mixed success.”

Currie rose to fame after correctly predicting the China-driven boom of the 2000s and that decade’s surge in oil prices. He has had less luck repeating the feat after outlining reasons for another supercycle that could last a decade. Rather than a sustained increase, prices have gyrated.

“We have never been this wrong for this long without seeing evidence to change our views,” the 56-year-old told Bloomberg Television in June shortly before trimming his oil-price forecast (which still sees oil rising just shy of $100 by year-end).

As Bloomberg adds, over his 27 years at Goldman, Currie’s standing in the market grew into a recognizable brand. The commodities unit leveraged that to drum up more business.

“He’s a little bit of a mad scientist,” said longtime Goldman colleague Colleen Foster, describing him as creative, eccentric and inventive. “There’s never a time I couldn’t get a meeting with a CEO, an oil minister or a hedge fund founder, if Jeff Currie was with me.”

After Currie caught the market’s attention with his correct call on oil’s surge to triple digits in the 2000s, his Goldman team infamously doubled down in May 2008. That was despite signs of trouble that spiraled into the financial crisis, sending oil crashing more than 75% in less than six months to below $35 a barrel. Still, he correctly predicted that oil would reach about $85 by the end of 2009, which it did.

He also had his bearish moments, such as in 2015, when he predicted oil would likely stay low for the next 15 years (less than a decade later it soared near record highs after the outbreak of the Ukraine war).

No matter his track record though, Currie’s fundamentally-driven and well-justified views were always closely followed in the market — including by company executives whose fortunes ride the ups and downs of commodity prices.His predictions sometimes fueled frustration, Cleveland-Cliffs Inc. Chief Executive Officer Lourenco Goncalves recalled in 2019.

“I have been critical of the Goldman Sachs commodity desk for years,” Goncalves said at the time. But after realizing they were finally in agreement on iron ore, “I was ready to give love to Jeff Currie. The first time in probably 10 years that the Goldman Sachs forecast for iron ore pretty much matched mine.”

An avid skier, Currie taught courses at the University of Chicago before joining Goldman in 1996. He and another top Goldman commodities executive were among a group that financed an effort to produce a 2010 documentary on the British rock band The Kinks.

Tyson Foods Inc., the world’s largest processor of chicken, beef, and pork, tumbled Monday morning in New York after it reported adjusted earnings per share for the third quarter that missed the average analyst estimate. 

Third Quarter Results:

• Adjusted EPS 15c vs. $1.94 y/y, estimate 26c (Bloomberg Consensus)

• Loss per share $1.18 vs. EPS $2.07 y/y 

• Sales $13.14 billion, -2.6% y/y, estimate $13.59 billion 

Third quarter sales declined due to weakening demand compared to the same quarter last year.

Third-quarter sales volumes reveal consumers ditched beef and pork for less expensive chicken. 

The real great rotation: from beef and pork to chicken. Tyson foods Q3:

Beef Sales Volume -5.3% vs, est -2%
Pork Sales Volume -1.8% vs, est +1.5%
Chicken Sales Volume +2.8% vs. -2.1% y/y

Insects undisclosed yet

— zerohedge (@zerohedge) August 7, 2023

There also appears to be a reduction in prepared food sales, such as items found in the frozen food section at supermarkets.

Third Quarter Sales:

• Sales volume +0.3%

• Beef Sales Volume -5.3% vs. +1.3% y/y, estimate -2%

• Pork Sales Volume -1.8% vs. -1.7% y/y, estimate +1.5%

• Chicken Sales Volume +2.8% vs. -2.1% y/y

• Prepared Foods Sales Volume -0.7% vs. -8.5% y/y, estimate +4% (2 estimates)

• International/Other Sales Volume +0.5% vs. +21.9% y/y

Update on the beef segment:

Update on the pork segment: 

Update on the chicken segment:

Tyson listed nine-month highlights that showed sales are flat: 

• Sales of $39,533 million, flat from prior year

• GAAP operating income of $68 million, down 98% from prior year

• Adjusted operating income of $697 million, down 81% from prior year

• GAAP EPS of $(0.56), down 108% from prior year

• Adjusted EPS of $0.97, down 86% from prior year

• Total Company GAAP operating margin of 0.2%

• Total Company Adjusted operating margin (non-GAAP) of 1.8%

• Repurchased 5.4 million shares for $343 million

Tyson shares plunged 11% at the opening of the cash session. 

Execs in May slashed the outlook for the year, calling the protein market “challenging.” Here’s an update on guidance:

Donnie King, President and CEO of Tyson Foods, wrote in a statement, “The current market dynamics remain challenging.” 

King announced the closure of four chicken facilities in North Little Rock, Arkansas; Corydon, Indiana; Dexter, Missouri and Noel, Missouri. 

The biggest takeaway is that American consumers are becoming more cautious and pulling back on meat purchases amid two years of negative real wage growth. 

Authored by Brandon Smith via Alt-Market.us,

Perhaps one of the most bizarre recent developments in economic news has been the attempt by establishment media (and the White House) to declare US inflation “defeated” despite all the facts to the contrary.

Keep in mind that when these people talk about inflation, they are only talking about the most recent CPI, which is supposed to be a measure of current inflation growth, not a measure of inflation already accumulated.

But, the CPI is easily manipulated, and focus on that index alone is a tactic for misleading the public on the true economic danger.

The way current US inflation is presented might seem like a fiscal miracle. How did America cut CPI so quickly while the rest of the world including Europe is still dealing with continuing distress? Is “Bidenomics” really an economic powerhouse?

No, it’s definitely not. I have addressed this issue in previous articles but I’ll dig into inflation specifically, because I believe a renewed inflationary run is about to spark off in the near term and I suspect the public is being misinformed to keep them unprepared.

First, lets be clear that there are four types of inflation – Creeping, walking, galloping and hyperinflation. We also should distinguish between monetary inflation and price inflation, because they are not always directly related (usually they are, but events outside of money printing can also cause prices to go up).

If we calculate CPI according to the same methods used during the stagflationary crisis of the 1980s, real inflation has been in the double digits for the past couple years. This constitutes galloping inflation, a very dangerous condition that can lead to a depression event.

There are multiple triggers for the inflation spike. The primary cause was tens-of-trillions of dollars in monetary stimulus created by the Federal Reserve, the majority of which took place on the watch of Barack Obama and Joe Biden (there have been multiple GOP Republicans that have also supported these measures, but the majority of dollar devaluation is directly related to Democrat policies). This epic “too big to fail” stimulus created an avalanche effect in which economic weakness accumulated like sheets of ice on a mountainside. The final straw was the covid lockdowns and the $8 trillion+ in stimulus packages pumped directly into the system. Then, it all came crashing down.

To give you a sense of how bad the situation is, we can take a look at the Fed’s M2 money supply (they stopped reporting the more complete M3 money supply right before the crash of 2008). According to the M2, the amount of dollars in circulation jumped around 40% in the span of only two years. That is an epic amount of money creation and I would argue that the economy still hasn’t processed all of it yet.

There have been too many dollars chasing too few goods and services. Thus, prices rise dramatically, with the cost of necessities increasing by 25%-50%. Think about that for a moment…it now costs us 25%-50% more per year to live than it did before 2020, and it’s not over by a long shot. Houshold costs are still climbing, and since inflation is cumulative we will likely never be rid of the increases that are already in place. But if that’s the reality, why is CPI going down?

The main reason has been the central bank pumping up interest rates. The more expensive debt becomes, the more the economy slows down. That said, the Fed has remained hawkish for a reason; they know that inflation is not going away. They need help if they’re going to convince the public that inflation is no longer a problem.

Enter Biden’s scheme of dumping America’s strategic oil reserves on the market as a means to artificially bring down CPI. Energy prices affect almost all other aspects of the CPI index, and when energy costs fall this make it seem like inflation has been tamed. The problem is that it’s a short term fraud. Biden has run out of reserves to dilute the market and the cost of refilling them is going to be exponentially higher. This is why you now see gas prices rising again and they will probably keep rising through the rest of the year.

On top of this there are also geopolitical factors to consider. The White House has earmarked over $100 billion in aid to Ukraine – A proxy war is one good way to circulate fiat dollars overseas as a means to reduce moneatry inflation at home, but it’s not going to be enough unless the war expands considerably. Then there is the problem of export disruptions.

For example, Russia is now officially and aggressively shutting down Ukraine’s wheat and grain exports, which is going to cause another price spike in wheat and all foods that use wheat. India just shut down major exports of rice to protect their domestic supply, meaning rice is going to rocket in price. And, there’s an overall trend of foriegn creditors quietly dumping the US dollar as the world reserve currency. All those dollars will eventually make their way back to the US, meaning an even larger money supply circulating domestically with higher inflation as a result.

The Fed doesn’t necessarily have to keep printing for inflation to persist, they just had to set the chain reaction in motion. The recent Fitch downgrade of the US credit rating is not going to help matters as it encourages foreign investors to dump the dollar and treasuries even faster.

To be sure, there is still the matter of the battle between deflationary factors vs inflationary factors. In October, the last vestiges of covid stimlus measures will finally die, including the moratorium on student loan debt payments – That’s trillions of dollars of loans pulling billions in payments each year.

Not only that, but when those loans were put on hold, millions of people magically had their credit ratings rise, which means they had access to higher credit card limits and a vast pool of debt. Now, that’s all going away, too. No more living off Visa and Mastercard means US retail is about to take a considerable hit along with the jobs market.

Then there’s the Fed’s interest rate hikes which are now about as high as they were right before the crash of 2008. The same hikes that helped cause the spring banking crisis (which is also not over). The US will be paying record interest on the national debt, consumers will be using far less credit and banks will be lending less and less money.

So yes, there will be competing forces pulling the economy in two different directions: Inflation and deflation.

However, I would argue that inflation is not done with us yet and that the Fed will have to hike a few more times to suppress it in the short term. In the long term, the viability of the US dollar is the issue, but that’s a discussion for another article…

*  *  *

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Update (0910ET):

Turkish state-run media reports the explosion at the Port in Derince might have been caused by grain dust. No vessels were impacted. 

• CAUSE OF TURKEY PORT EXPLOSION THOUGHT TO BE GRAIN DUST: TRT
• TURKEY PORT EXPLOSION DIDN’T IMPACT ANY SHIPS: STATE-RUN AA

*   *   * 

Footage on social media shows a major explosion rocked a silo facility at the Port in Derince, Turkey. Reports say the facility is a storage area for wheat. 

*EXPLOSION AT SILO OF TURKISH GRAIN BOARD IN KOCAELI PROVINCE:AA

— zerohedge (@zerohedge) August 7, 2023

Bloomberg said the explosion occurred around 1400 local time in storage units owned by the country’s grain agency, known as Turkish Grain Board. Other reports say the blast happened in an elevator while loading a bulk carrier with grain. Nothing has yet to be confirmed. 

⚡️Video of the explosion at a Port in Derince, Turkey. pic.twitter.com/NbMeOvJvz2

— War Monitor (@WarMonitors) August 7, 2023

The Mirror reports:

The cause of the explosion at the port in Kocaeli’s Derince district is still unknown as residents reported their home shaking and footage shows thick plumes of black smoke billowing for miles. Five people have been injured, according to the local fire service. 

Local Mayor Zeki Aygün said, “My office is about 1 km away and I felt an earthquake. We have five injured people right now. Friends are working. We know that there was an explosion. The bottom of the two silos I saw was opened.”

Here’s more video of the incident: 

A powerful explosion went off outside the major Turkish commercial port of Derince in Kocaeli.
According to CNN Turk, the explosion occurred in a grain elevator as a ship loaded with grain. pic.twitter.com/8AxVZjRe2v

— Alexander Cloud (@cloud_alex8888) August 7, 2023

CNN TÜRK reporter Hasret Kaya said in a live broadcast: 

“One of the wheat silos exploded. It is thought to have happened while a ship was buying wheat at that point. It is thought that it took place quickly due to the wheat silo, but whether there was periodic maintenance we do not know. The authorities have not yet made a statement. This will be clarified in the coming period. This is the information we have received from the region.”

Traders have reacted slowly to the developments as wheat futures remain muted. 

The blast at Derince might add more food insecurity woes after Russia terminated the Black Sea Grain deal last month. In response, Ukraine has threatened to target Russian ships. 

Authored by Simon White, Bloomberg macro strategist,

Friday’s jobs data sparked a relief rally in bonds and a flatter yield curve, but the pain trade is still for higher yields and a steeper curve – the lesser-spotted bear steepener – with this week’s CPI a potential catalyst.

Last week was a turbulent one for bonds, but the continued softening in payrolls data served to remind the market that supply and fiscal-profligacy fears have to be counter-balanced with an economy that’s in its late-cycle stages.

After the data, 10-year yields took the elevator back down to sub-4.05% after briefly going above 4.20%. They have since clambered back to 4.12%, but their next cue is likely to come from Thursday’s CPI report. Headline is expected to nudge back up to 3.3% (from 3% last month), mainly due to base effects, and core is expected to hold steady at 4.8%.

Still, stronger-than-expected data probably means higher yields in a market more acutely alert to inflation (and therefore supply) risks. As with last week, term premium would likely drive the move, meaning a curve steepening. After relentlessly flattening for the last two years, the pain trade is for a steeper curve. Implicit positioning of speculators from the COT report shows there is a heavy skew to a flatter curve.

The negative carry for most flatteners remains punitive (for 2s10s USTs it’s ~83bps over a year), but the large upside potential from supply/inflation worries and the covering of positions begins to make that look less insurmountable.

Finally, the Bundesbank’s decision to stop paying interest on domestic government deposits – which initially pushed short-term German bonds higher this morning – highlights the broader issue of central banks paying interest on reserves when they are superabundant.

In the days of QE and 0% interest rates, the ECB and Fed at al. remitted money to their treasuries from the income on their bond portfolios.

But now that is reversed as bond income is dwarfed by the cost of paying interest on trillions of bank reserves. Take the Fed, whose debt to the Treasury is now accruing at over $2 billion each week.

This is something that will become more politically contentious, especially as economies continue to slow and cost-of-living pressures bite further.

A selloff in treasuries and global government bonds returned with a vengeance on Monday as the threat of further rate hikes unsettled traders. With 10Y TSY yields jumping as much as 9bps from 4.03% to 4.12% overnight, the yield on 30-year German bonds surged nine basis points to 2.72%, the highest since early 2014. However, unlike Friday when stocks tumbled as yields spiked to a fresh 2023 high, on Monday US equity futures rose modestly – at least for now – alongside yields in subdued, listless trading, signaling a rebound from Friday’s rout. At 7:45am ET, S&P futures higher by about 0.2% although European stocks were in the red, following softer-than-expected German June industrial production data, and Asia was mixed. The dollar was a little stronger against G10 currencies while oil and iron ore prices are lower, despite a Ukraine drone attack on a Russian oil tanker, the first of many.

As JPM’s trading desk notes this morning, expect a return of hawkish Fedspeak this week though CPI remains the key data point, in an otherwise light macro data week; tied to that, JPM’s chief economist Michael Feroli hiked his 23Q3 GDP estimate from +0.5% to +2.5% while removing his recession call. Meanwhile, as we reach the tail-end of earnings, we may see some inter-sector rotations as investors consider an improving economy.

In premarket trading, Yellow Corp. fell as much as 45% in premarket trading on Monday, after the trucking firm filed for bankruptcy and said it will remain shuttered. Wayfair gained 2.5% after UBS upgrades its rating to buy from neutral, writing that the market may be surprised by the scope for profit upside at the online retailer. Some other notable movers:

• PG&E rises 1.3% as UBS upgrades the utility to buy from neutral, citing a declining wildfire risk.
• Berkshire Hathaway shares rise as much as 1.8% after Warren Buffett’s conglomerate posted gains in operating profit driven by strength in its insurance businesses.
• Fortinet rises as much as 3.2% as Guggenheim upgrades the cybersecurity firm’s stock to buy from neutral, saying the current share price level is an opportunity to build a position in a “differentiated, high-quality security asset.”

Over the weekend, Fed Governor Michelle Bowman said that the US central bank may need to raise rates further in order to fully restore price stability. According to Bloomberg, “Investors also considered mixed signals from Friday’s US jobs, which showed wages above forecast even as payrolls growth moderated”, even though on Friday the only thing they considered was the dovish consequences of another drop in the monthly payrolls.

“We don’t think central banks will get the rise in unemployment rate and sustained moderation in wage growth in the coming year that they hope to see,” ADA Economics Ltd. Chief Economist Raffaella Tenconi said in an interview with Bloomberg TV.

The most important data point this week will be US CPI reading on Thursday, which is expected to show moderate price growth. The index is projected to rise 0.2% in July for a second month after excluding food and energy costs, marking the smallest back-to-back gains in 2 1/2 years.

European stocks retreated as a index of German industrial output fell to a six-month low, underscoring weakness in the economy. European stocks struggle with the Stoxx 600 down 0.4%, although in very light volumes with trading of Euro Stoxx 50 stocks about 40% less than the 30-day average. Here are the most notable European movers:

• Scout24 gains as much as 9.4%, the most since April, after the online property-rental platform boosted its full-year guidance. The company cited contributions from the recent acquisition of Sprengnetter, and strong demand for its marketing products and paid subscriptions
• CTS Eventim shares rise as much as 7.8%, the most since November, after JPMorgan initiates coverage of the ticketing and live entertainment operator at overweight. The company will benefit from a strong pipeline of live events for the next few years, JPMorgan said
• Siemens Energy shares gain as much as 5.2%, reversing an earlier decline, as analysts highlighted the German renewable energy firm’s strong orders even after it identified charges of €2.2b in its wind unit
• PostNL jumps as much as 7.9% after boosting normalized Ebit guidance for the full year. The Dutch delivery company reported a 7.1% increase in parcel revenue in the second quarter
• OHB shares rise as much as 34% to €43.15 after KKR said it plans to take the German space and technology company private for €44/share alongside the founding family as competition in the satellite sector heats up
• Card Factory shares rise as much as 18% after the company said it expects financial performance to be materially ahead of previous expectations
• Aurubis slumps as much as 8.2%, the worst performer on the Stoxx 600, after the copper smelter released third-quarter results that Morgan Stanley says showed weaker underlying profit before tax and free cash flow
• Telefonica Deutschland falls as much as 1.7% after the telecommunications company was cut to underperform at Oddo BHF after recent news that 1&1 will switch its mobile traffic to the Vodafone network as of mid-2024

Earlier in the session, Asian stocks were mixed with a cautious start to the week, weighed down by concerns about higher US interest rates and a widening anti-graft crackdown on the pharmaceutical sector in China. The MSCI Asia Pacific Index fell as much as 0.3%, with Chinese pharmaceutical stocks among the biggest losers. Benchmarks in Taiwan, Singapore, India and Vietnam gained.

• Stocks in China were under pressure after authorities widened an anti-graft crackdown on the healthcare sector. The CSI 300 Healthcare Index declined by the most in nine months. Hang Seng and Shanghai Comp conformed to the subdued mood with mixed fortunes in Chinese developers clouding over the gains in energy and with participants cautious heading into upcoming key releases including the trade data on Tuesday followed by inflation figures on Wednesday.
• Nikkei 225 initially suffered from early selling after it gapped beneath the 32,000 level at the open but then staged a recovery and returned to above the aforementioned key psychological level.
• ASX 200 was marginally lower amid weakness in healthcare, financials and tech heading into a busy week of earnings including Australia’s largest lender CBA which is set to report on Wednesday.

“It is too early to say whether the pharma crackdown will weigh on the markets. However, it is possible that it could lead to increased uncertainty and volatility in the short term,” said Manish Bhargava, a fund manager at Straits Investment Holdings in Singapore. Investors are also assessing the mixed US jobs report.

In FX, the Bloomberg Dollar Spot Index is up 0.1% as markets weighed the economic outlook for the US and hawkish commentary from Federal Reserve Governor Michelle Bowman. The Swedish krona is the weakest, followed by the Swiss franc. USD/JPY rose 0.4% snapping three days of losses as the yield differential continues to weigh on the Japanese currency. EUR/USD slides 0.3% as German industrial production data slumped to a six-month low.

In rates, Treasuries were cheaper across the curve after yields tanked on Friday, following similar losses in long-end European rates, where German 30-year yields rise to highest since January 2014. Treasury yields cheaper by 6bp to 7bp across the curve with 10- year yields sitting around 4.11%, paring much of Friday’s sharp rally. The US Treasury curve bear flattened after weekend comments from the Fed’s Bowman, who said that more rate hikes are likely needed, appear to weigh on Treasuries; two-year yields are up 8bps.  Gilts lag behind by around 1bp in the sector while bunds marginally outperform — German 2-year yields remain richer by almost 4bps on the day, rallying after the Bundesbank said it would stop paying interest on domestic government deposits, while 10-year borrowing costs rise 2bps. Dollar IG issuance slate contains three deals already; syndicate desks are projecting around $30 billion in new bond sales this week. Treasury auctions resume Tuesday with $42bn 3-year note sale, followed by $38bn 10-year Wednesday and $23b 30-year bond sale Thursday.

In commodities, crude futures decline, with WTI falling 0.7% to trade near $82.30. Wheat futures rise 2.5% after Ukrainian drone attacks on a Russian naval vessel and oil tanker. Spot gold falls 0.3%.

It’s a quiet calendar today, with earnings season dying down while the only event on the economic calendar is consumer credit at 3pm ET.

Market Snapshot

S&P 500 futures up 0.3% to 4,513.50

Brent Futures down 0.4% to $85.91/bbl

Gold spot down 0.4% to $1,934.67

U.S. Dollar Index up 0.27% to 102.29

Top Overnight News

• President Joe Biden is expected to issue his long-awaited executive order to screen outbound investments in sensitive technologies to China early next week, according to people familiar with the matter. RTRS
• US companies are accelerating efforts to reduce their dependency on Chinese suppliers as tensions between the two countries escalate. Washington Post
• Japanese civil servants may see the biggest base salary increases in more than two decades, following historic pay hikes in the private sector agreed during spring wage negotiations. The National Personnel Authority recommended Monday that average monthly salaries of public servants be increased by around 2.7% in the current fiscal year. This includes a base pay hike of 0.96%, the largest such increase in 26 years. BBG
• Ukraine launched more drone attacks on Russia over the weekend, crippling a naval vessel and an oil tanker. Significantly higher insurance and shipping costs are likely to follow for Moscow, along with increased risk to global markets. Talks between Ukraine and its allies to end the war brought few tangible developments. BBG
• Rising US fuel prices are triggering alarm in Washington just as President Joe Biden steps up his bid for re-election by touting lower inflation and the strength of the US economy. FT
• Fed’s Williams gives an extensive interview to the NYT and says rate cuts are possible in 2024 given the trajectory of inflation (Williams notes that real rates will continue moving up as inflation cools, which means the Fed will have to lower the Funds Rate in order to prevent overtightening). NYT
• Rising US fuel prices are triggering alarm in Washington just as President Joe Biden steps up his bid for re-election by touting lower inflation and the strength of the US economy. FT
• Ron DeSantis promised a reset of his presidential campaign. Many of his campaign staffers are still waiting. Several aides believe the Republican candidate’s bid lacks a coherent strategy and message, according to people familiar with the campaign. BBG
• Apple is bulking up its expertise in generative AI to adapt it for iPhones and iPads, as the world’s biggest company by market value seeks to take advantage of the technology that has taken the industry by storm this year. FT

A more detailed look at global markets courtesy of Newsquawk

Asia-Pac stocks began the week mostly negative following on from last Friday’s late retreat on Wall St as Apple shares extended on their losses post-earnings and as the regional bourses reacted to the weaker NFP and firmer-than-expected US hourly earnings. ASX 200 was marginally lower amid weakness in healthcare, financials and tech heading into a busy week of earnings including Australia’s largest lender CBA which is set to report on Wednesday. Nikkei 225 initially suffered from early selling after it gapped beneath the 32,000 level at the open but then staged a  recovery and returned to above the aforementioned key psychological level. Hang Seng and Shanghai Comp conformed to the subdued mood with mixed fortunes in Chinese developers clouding over the gains in energy and with participants cautious heading into upcoming key releases including the trade data on Tuesday followed by inflation figures on Wednesday. Chinese FX Reserves (Monthly) (Jul 2023) 3.204Trl vs. Exp. 3.2Trl (Prev. 3.193Trl).

Top Asian News

• China’s biggest mutual funds are nearing government limits on offshore investment as they seek higher returns abroad amid slower domestic growth, according to FT.
• EU trade chief Dombrovskis is to push China on barriers to exports and hopes to address very unbalanced ties after a surge in Chinese imports, according to FT.
• The Philippines condemned China’s Coast Guard for firing a water cannon at its vessels in the disputed South China Seas which it said was illegal and dangerous, while China said it took necessary controls against Philippines boats which ‘illegally’ entered its waters according to AFP. Furthermore, the US Embassy in the Philippines said that they stand with Philippine allies in the face of dangerous actions by China’s Coast Guard and maritime militia to obstruct a Philippine resupply mission, while Global Times’s Hu Xijin tweeted that the more US supports it, the more determined the Chinese Coast Guard will be to drive away Philippine vessels that illegally intrude.
• BoJ Summary of Opinions from the July meeting stated the Bank needs to patiently continue with monetary easing toward achieving the price stability target and in order to achieve the price stability target of 2% in a sustainable and stable manner, it is necessary for the Bank to keep supporting the momentum for wage hikes through the continuation of monetary easing. Furthermore, it was stated that given that there are increasingly significant upside and downside risks to the outlook for prices, it is appropriate for the Bank to conduct yield curve control with greater flexibility in order to respond to these risks.

European bourses are under modest pressure with the overall tone relatively indecisive with a summer feel to markets, Euro Stoxx 50 -0.3%. Sectors are mixed but with the breadth relatively narrow and individual stock specifics somewhat limited. Stateside, futures are in the green and feature some slight outperformance in the NQ after marked pressure last week; ES +0.3%, NQ +0.4%.

Top European News

• City of London is urging the BoE to delay bank capital rules until mid-2025 with bankers arguing that regulatory divergence would affect the UK’s ability to compete with the US, according to FT.
• UK businesses urge PM Sunak to reverse the increase in visa fees for skilled workers and warned that the additional costs of hiring from overseas would hamper efforts to plug staff shortages, according to FT.
• European companies reportedly suffered a EUR 100bln hit from Russian operations in which energy and utility groups reported over half of the combined losses, according to an analysis by FT on the direct impact of the Ukrainian war.
• EU Foreign Affairs Minister Borrell says he has discussed with China’s Foreign Minister Yi the upcoming strategic dialogue within Beijing in preparation for the EU-China summit, exchanged views on Niger and the Jeddah meeting re. Ukraine.

FX

• A firm start to the week for the broader Dollar and index following Friday’s post-NFP selloff which, at the time, was attributed to unwind of the acute bond selloff earlier last week.
• Antipodeans are the relative outperformers but are essentially unchanged with the AUD within Friday’s 0.6540-6609 boundaries and NZD on either side of 0.6100.
• Havens are lagging as USTs/EGBs retreat and yield-differentials become unfavourable while the EUR was unreactive to better-then-expected Sentix after another soft German release.
• PBoC set USD/CNY mid-point at 7.1380 vs exp. 7.1656 (prev. 7.1418)

Fixed Income

• Core benchmarks have come under modest pressure throughout the European morning with specific catalysts light and well within Friday’s boundaries thus far ahead of US supply.
• USTs pressured by remarks from Fed’s Bowman who remarked that more US hikes will likely be needed. More recently, little reaction to a lengthy release from Fed’s Williams who expressed little preference on September and remarked they are pretty close to the peak rate.
• Bunds are at the low-end of 131.85-132.39 parameters, a range that eclipsed Friday’s peak by a handful of ticks but still has some way to go before last week’s/Friday’s 131.12 trough.
• Gilts are directionally in-fitting with the above but with magnitudes slightly more pronounced as the benchmark posts downside of circa. 45 ticks.

Crude

• Crude benchmarks are in the red with WTI Sep’23 below USD 82.00/bbl and Brent sub-85.50/bbl, action which comes on the back of the pressured risk sentiment.
• Spot gold and base metals are under USD-induced pressure with limited fundamental drivers in play at this point.
• Saudi Arabia set September Arab light crude OSP to Asia at + USD 3.50/bbl vs Oman/Dubai and to Northwest Europe at USD + 5.80/bbl vs ICE Brent, while it set light crude OSP to the US at + USD 7.25/bbl vs ASCI, according to Reuters.
• Saudi Aramco CEO says their mid-to-long term view remains unchanged; Aramco also intends to increase gas production capacity to meet domestic demand growth; despite economic headwinds, they see positive signals that global demand remains resilient. China’s demand has been stronger than expected. Chinese demand is expected to grow and support the current market recovery. Seeing signs of recovery of the economy in H2, still room for aviation recovery further.
• Thai Commerce Minister says there is no need to ban Thai rice exports; Thai rice exports to benefit from India’s rice export ban.

Geopolitics

• Ukrainian intelligence source said a sea drone struck a Russian tanker in a joint operation between Ukraine’s security service and navy, according to Reuters.
• Russian Defence Ministry said it struck Ukrainian air bases in Rivne, according to Broadcaster Geo Media. Russia’s Defence Ministry also said Russia scrambled a Su-30 jet due to a US reconnaissance drone over the Black Sea, according to Ifax.
• Russian Deputy Foreign Minister said Russia has the military and technical capabilities to eliminate threats to security in the Black Sea, according to TASS.
• Russian Foreign Ministry spokeswoman said Russia strongly condemns a Ukrainian ‘terrorist attack’ on a Russian civilian vessel in the Kerch Strait and that Russia will respond to Ukraine’s ‘terrorist attacks’, according to TASS.
• Moscow’s Mayor said a Ukrainian drone was destroyed by air defences on approach to Moscow, according to Ifax. It was separately reported that Moscow’s Vnukova Airport suspended flights although no reason was given, according to TASS.
• Participants in the Jeddah meeting regarding the Ukrainian conflict underlined the importance of continuing consultations to build common ground that will pave the way for peace, according to the statement by Saudi Arabia cited by Reuters. Furthermore, Ukraine’s allies were buoyed by the ‘constructive’ China signals with Beijing positive on engaging in future negotiations on finding a resolution to the war, according to FT.
• Turkey’s Foreign Minister discussed the Black Sea Grain initiative during a phone call with US Secretary of State Blinken, according to a Turkish Foreign Ministry source.
• Explosions were heard over the vicinity of Syria’s Damascus as Syrian air defences confronted Israeli aggression which resulted in the deaths of four Syrian soldiers according to state TV.
• UK’s government is split regarding listing Iran’s Revolutionary Guard as terrorists, according to FT.
• North Korean leader Kim gave field guidance at a major munitions factory, while he inspected factory manufacturing engines for strategic cruise missiles and unmanned aerial vehicles, according to KCNA.

US Event Calendar

• 15:00: June Consumer Credit, est. $13.6b, prior $7.24b

DB’s Jim Reid concludes the overnight wrap

We had two US payrolls and two inflation releases to get through before the next FOMC in September and although the first of these on Friday was a mixed affair, it did trigger a big rally across the US rate curve with 2yr and 10yrs -11.7bps and -14.1bps tighter, respectively, on the day even if yields were still higher at the long-end on the week. We’ll review the main payroll highlights below but with that out the way we move on to the next big one, namely US CPI on Thursday. PPI follows fast behind on Friday alongside the University of Michigan consumer survey which contains the all-important inflation expectations series. In Europe, the focus will be on GDP numbers in the UK (Friday), industrial production in Germany (today), the ECB’s Consumer Expectations Survey (tomorrow) and China CPI/PPI (Wednesday). Corporate earnings wind down quite sharply with 33 S&P 500 and 55 Stoxx 600 companies reporting this week.

Before we preview CPI, its worth reviewing what our economics team thought about payrolls given the huge rates move, albeit in context of a week where rates went up a lot earlier in the week. The gains in both headline (+187k vs. +185k last) and private (+172k vs. +128k last) payrolls were pretty much in line with our forecast of +175k on both. As our economists’ highlight in their weekly preview here, as has been the case recently, most of the job gains came from private education and health services as well as leisure and hospitality, which together grew by +117k. Some of the leading indicator industries showed job losses, namely manufacturing (-2k), transportation and warehousing (-8k), and temporary help services (-22k). Temp help data only goes back a few decades but declines have been a good lead indicator in the past. There was also some talk of this being the sixth successive month where we’ve had downward revisions to the prior month, something that has happened in the past around labour market turning points.

There was also a one-tenth decline in average weekly hours. This, combined with the moderating pace of job growth, has aggregate hours worked unchanged over the last six months. While average hourly earnings (AHEs) surprised again to the upside (+0.4% vs. +0.4%, a tenth high than expected), the year-over-year growth rate of our economists’ nominal wage income proxy (private payrolls times average weekly hours times average hourly earnings) declined from 6.3% to 5.7%, much closer to the average of 4.6% that prevailed from 2015 to 2019. However, the unemployment rate fell back down a tenth to 3.5% while the U-6 underemployment rate unwound its two-tenths rise in June, falling to 6.7%. Wage growth is also not trending towards the 3% that Chair Powell cited as being consistent with their inflation target. Indeed, year-over-year growth in AHEs seems to have stalled out around 4.3-4.4%, where it has hovered since the beginning of the year. Short-term trends also show some signs of re-acceleration, with the three-month annualised change at 4.8%. For more see our economists’ labour market chartbook: “July Jobs: Same song, different verse?”.

In conclusion there was no real conclusion from the report. There was something for everyone. Unless there’s a sudden shock though, any path to a hard landing is likely to be via signs of a soft landing first but the bulls will say that’s where it will stop. You pays your money and you takes your choice.

So next stop is US CPI on Thursday. One thing to bear in mind for inflation over the next few months is the +15.8% gain in the WTI crude price last month. Gasoline prices are rising fast too. Too early perhaps to make much inroads yet but a complication if prices stay elevated. In fact, for now, with seasonally adjusted gas prices down a bit from June, our economists expect a slightly weaker headline (+0.17% forecast vs. +0.18% previously) reading relative to core (+0.21% vs. +0.16%). This would equate to 4.8% YoY for core (though it is very close to rounding down to 4.7%), however, shorter-term trends should show significant improvement. The three-month annualised rate should fall by about 80bps to 3.3%, while the six-month annualised rate should fall by 40bps to 4.2%, both the lowest in over two years.

With regards to the ever-important core services excluding rent and medical services sector, last month’s data showed significant progress. This category posted the second-lowest monthly print in the last 21 months (unch.), though much of this weakness was due to a sharp -8.1% drop in airfares. Our economists explain that this decline brings airfares back to pre-pandemic levels, so is that normality returning or was last month an anomaly. We will see.

Staying with inflation, China CPI and PPI numbers on Wednesday are interesting as the country sits on the brink of consumer price deflation with the latest readings printing 0.0% for the CPI and -5.4% for the PPI YoY. Current median estimates on Bloomberg point to a -0.5% YoY CPI and -4.0% YoY PPI reading.

Asian equity markets are largely trading lower at the start of the week but US futures are rebounding. As I check my screens, Chinese stocks are leading losses with the CSI (-0.77%) the biggest underperformer followed by the Shanghai Composite (-0.60%) and the Hang Seng (-0.28%) as markets grow a bit impatient over the lack of major stimulus steps from Beijing. Elsewhere, the KOSPI (-0.22%) is also in the red while the Nikkei (-0.02%) is paring earlier losses. Outside of Asia, S&P 500 (+0.40%) and NASDAQ 100 (+0.57%) futures are higher, after coming off their worst week since March. Meanwhile, yields on 2yr and 10yr USTs are +4.4bps and +2.4bps higher, respectively, reversing some of Friday’s declines as we go to print.

Looking back on last week now, and even with a volatile rates week, expectations for the next Fed meeting in September didn’t change much, falling by -1.0bps on Friday and -1.5bps on the week.

All the fun and games was at the longer end. US 10yr Treasury yields fell back -14.1bps on Friday, but still ended the week +8.4bps higher after the earlier sell-off following the US credit rating downgrade by Fitch and higher refunding announced by the US Treasury. The 2yr yield likewise fell -11.6bps on Friday but was down by -11.2bps on the week. A twist steepening thus remained the main story, with the 2s10s curve +19.6bps steeper on the week at -73.7bps (but -2.9bps on Friday). The 30yr yield was up +19.0bps on the week despite a -9.0bp rally on Friday. Over in Europe, the moves were similar in direction if smaller in magnitude, with 10yr bunds selling off by +6.8bps on the week despite Friday’s rally (-4.2bps).

In equity markets, a sell-off in the US session left the S&P 500 down for the fourth day in a row on Friday (-0.53%), leaving it with a -2.27% weekly decline, the sharpest since the SVB crisis in early March. Tech likewise struggled last week as the NASDAQ fell back -2.85% on the week (-0.36% on Friday). The index was weighed down by Apple, which fell by -4.80% on Friday, although this was largely offset by Amazon’s strong +8.27% gain, after the two mega caps reported results the previous evening. European equities saw a similarly underwhelming week, with the STOXX 600 down -2.44% despite gaining on Friday (+0.29%).

Lastly, in commodities, oil continued its upward march last week, propelled upwards by Saudi Arabia’s fresh announcement of voluntary cuts earlier in the week to reach its sixth consecutive week of gains. WTI crude gained +2.78% week-on-week (and +1.56% on Friday) to $82.82/bbl. Brent crude rose +1.47% (and +1.29% on Friday) to $86.24/bbl. Rising US yields and the overall risk-off sentiment weighed on the industrial metals market, as the Bloomberg index of industrial metals fell -1.25% week-on-week (and -0.41% on Friday).

Authored by Matthew Piepenburg via GoldSwitzerland.com,

I recently blew the dust off an old Rudyard Kipling poem, “If,” which many have castigated as a bit overly romantic, despite its high praise from Mark Twain and T.S. Eliot to India’s Khushwant Singh.

The fact, moreover, that “If” was written by a Victorian era colonial in 1865 as a father’s advice to a son, could easily put its otherwise timeless insights at risk of being cancelled by the woke elite as potentially misogynistic or regionally insensitive…

Notwithstanding such critiques, financial readers might equally be asking what Kipling has to do with global markets, the currency wars, inflation/deflation tensions or the US bond market?

Well, given the fact that each of these financial topics, when examined closely or even broadly, are now signs of open madness, yet still consistently ignored or down-played by our leaders and media midgets, I could not help but consider the following (and opening) line of advice:

“If You can keep your head when all about you

Are losing theirs…”

Well: Can we?

What is Happening All About You? A Complete Denial of Debt’s End-Game

As headlines from an increasingly distrusted 4th Estate debate everything from a challenged USD (the recent BRICS gold hysteria) and weaponized State Department (Raytheon’s war in the Ukraine graveyard) to an equally weaponized/politicized justice system (Hunter vs. Trump’s legal woes), most of America seems blind to a ticking time bomb.

That is, amidst all the political and social distractions of late, the financial wizards leading an increasingly splintered America have been quietly doing what they do best: Sending the USA into a fatal debt spiral.

I recognize, of course, that bonds, budgets, deficits and yield curves don’t excite the same immediate reactions as, say, Joe Biden’s now undeniably compromised mental state or who or what’s image adorns a can of Bud Light, but as I’ve said so many ways and times: Debt matters.

In fact, debt destroys nations. And not just sometimes, but every time.

Such destruction, hiding in plain sight, is creepy, because, well…it creeps up on us slowly, and then—all at once.

The Latest Creepy Numbers Creeping out of DC

But sadly, debt data and bond markets bore most citizens.

This is why the majority of invisibly taxed and intentionally enslaved American serfs probably haven’t noticed that the US Treasury Department’s quarterly net-borrowing estimates for the second half of 2023 just came out, and that number is a sickening $1.85 TRILLION.

Read that again. $1.85T in 6 months.

This is openly ignored madness. Our experts having officially lost their minds.

We are talking about nearly 2000 billion (or 2 million millions) of new debt to be created/issued in the span of months, the implications of which are staggering.

This is especially scary when you add Powell’s 525 basis point rate hikes into the borrowing equation, which only makes the interest-expense of this appalling debt (cess) pool beyond payable without, well…more debt creation.

So, there you have it, American monetary genius: “We can solve a debt problem with more debt.”

Keeping Our Heads When All About Us Are Losing Theirs

But just because the “experts” in DC (who made Faustian bargains with their common sense and advanced degrees in exchange for a DC job title) may have completely lost their ambitious little minds/heads, it doesn’t mean the rest of us can’t hold on to ours.

Fighting Inflation Will Increase Inflation

Powell’s comical, and ultimately disingenuous, war on inflation, for example, is actually poised to end in far greater inflation, something understandable to any whose market attention span is greater than a typical tweet or YouTube short.

As a June white paper from even the St. Louis Fed recently confessed (and folks like Luke Gromen better explained), the US is approaching a grossly paradoxical point called “Fiscal Dominance,” a sober concept of basic math which I boil down to this:

“When a debt-strapped nation with nearly $33T in public debt raises rates to ‘fight’ inflation, the increased cost of servicing that debt becomes so egregious that the only way to ‘pay’ for it will come from a re-ignited mouse-click money-maker at the Fed, which is inherently, well: Inflationary.”

In other words, at some point (and don’t ask me when, but it’s looming), the Fed will pivot from dis-inflationary QT to mega-inflationary QE—all to be conveniently blamed on COVID, Putin and/or the climate.

It has always been my personal view, however, that Powell’s Volcker 2.0 charade of raising rates and trimming (barely) the Fed’s balance sheet to “fight” inflation has been a deliberate ruse.

His hawkish narrative buys him time to replenish the ammunition of his only two monetary weapons (rates and money supply) so that he’ll have more to cut (rates) and expand (Fed balance sheet) once overly-stretched credit markets blow to shreds.

At that point we’ll see: 1) QE to the moon and/or 2) a monetary re-set that will make Bretton Woods look like a pleasant game of international snooker.

Credit Markets, Death by a Thousand Cuts

In fact, this “blowing to shreds” process in the credit markets has already begun, in a kind of death by a thousand cuts.

Just ask all those nations dumping USTs, or all those regional banks that have failed and all those bigger banks consolidating (i.e., centralizing); or ask all those mutual fund managers who lost greater than 20% in 2022, or the repo markets back-firing since 2019, or all those foreign sovereign bonds (from gilts to JGB’s) tanking and all those wannabe BRICS+ nations looking for anyway they can to join a sanctioned Russia and patient China to trade outside of an openly weaponized USD.

In other words, it’s not just that change is gonna come, it’s literally all around us, hiding (or ticking) right before our media-distracted eyes.

Buying Time Today as More Things Break Tomorrow

Powell, in the meantime, will stick to his “data dependence” and bide his time going higher for longer until something, i.e., topping markets now riding the AI tailwind (narrative), finally break under their own grotesque weight.

So yes, debt matters. Deficits matter. And supporting Uncle Sam’s otherwise unloved IOUs matters.

This is because, and I’ll say it again and again and again: The bond markets matter.

Why?

Repeat: The Bond Market Matters

Because if no one is buying those over-supplied bonds (see above), their yields spike in a simple supply & demand mismatch, which means the cost of serving US debt—which is the only wind beneath our national/financial wings—spikes too.

Spiking debt costs, of course, are a death knell to a system (from banks, bonds, stocks and Treasury Departments) already drowning in historically unprecedented (and unpayable) debt.

Thus, without more inflationary mouse-click money (QE) to stave off more credit contraction, bank deaths, failed UST auctions, and all those low-rate, extend-and-pretend-addicted companies on an S&P 500 (which is nothing more than an S&P 7 in terms of real market cap), the slow implosion discussed above becomes a sudden implosion.

Recession Denial

And that’s not even factoring in a looming but now Powell-ignored and media-down-played recession, that malleable term of economic art, which, like inflation and employment data, those fiction writers at the BLS and Eccles Building can redefine at their convenience.

Facts, after all, are like math. They are stubborn. This is why the experts are apt to distort them, like a corrupt lawyer who tampers with evidence to win a jury trial. That is, even a witch looks pretty when you hide the warts.

As I’ve argued many times, and based upon recent on-the-ground experience in USA main streets as well as a neon-flashing yield curve, the conference board of leading indicators and the year-over-year change in the M2 money supply, America is already in a recession.

At some point, even Powell’s forked tongue and the DC data manipulators won’t be able to hide a recession which citizens feel despite CNN, The View or their politicos telling them otherwise, especially as gas prices and lay-offs continue to rise into year-end.

Recession, Banana Republic America and the Inflation/Deflation Cycle

Toward this end, we need to keep our heads and think for ourselves about what recessions can do to countries like the USA whose balance sheet and debt levels are quantifiably no better than your average, and once mocked, banana republic.

Like any banana republic, extreme debt and embarrassing deficits spell their doom, as over time such heavy debt tides are inherently inflationary, despite the current (and expected) dis-inflationary period.

After all, crushing the middle class and small business sector with a record-breaking rate hike is dis-inflationary.

In a recession, for example, a nation’s already weakened ability to produce goods and services (thanks to Powell’s rate hikes) at levels high enough to sustain those deficits only gets even weaker.

As Luke Gromen again argued, and illustrated below, a recession could easily send the US deficit to $4.5T, or 8% of GDP.

In such an all-too-likely deficit scenario (and all we really have today are bad scenarios), we could see bonds fall into the next official recession (always announced too late), as we saw them fall along side stocks in the 2020 COVID crash.

If bonds fall in a similar manner, this means bond yields, and hence rates, would rise, which would only add more pressure on the Fed to issue more US IOUs then paid for with more inflationary mouse-click Dollars to control their yields.

For now, and as Gromen, and myself, would confess, such a view is still a minority view—but that doesn’t necessarily make it a wrong view, especially in a world figuratively losing it head.

Alternative Scenarios Are No Better

But even the most sober convictions must consider alternative scenarios and views.

Like Brent Johnson, I agree that we could easily see an implosion in the EU markets (Germany now in recession) or even in Japan long before the US markets raise their white flags and surrender to instant, mouse-click liquidity measures.

In such a “foreigners-first” scenario, we could indeed see a flight into the perceived “safety” of the UST and hence USD as the best horse in the global slaughter house.

Such a “milk-shake inflow” (or straw-sucking sound) into USTs could take some temporary pressure off the Fed’s inflationary QE gas pedal. It could also make the USD stronger rather than weaker in the interim.

The End-Game Stays the Same

But no matter which white flag goes up first, from Tokyo to Berlin to DC, the end-game for all debt-soaked nations, regions, currencies and systems is ultimately the same.

That is, and to repeat, there really are no good scenarios left, just more desperate measures to buy time and postpone the inevitable.

As I wrote elsewhere, even the most proud and victory-accustomed armies, from Napoleon’s Grande Armee in 1812 to Lee’s Army of Northern Virginia in 1863, eventually extend themselves too far and suffer a “Gettysburg Moment.”

Nations whose debt levels are too far extended offer no exception to this rule or metaphor.

That is, no brave cavalry or infantry charge by Marshal Ney or General Picket can defy the simple law of too many bullets against too few men.

Too Many Debts, Not Enough Liquidity

Like Japan, the EU and the UK, America has too many debts and not enough natural liquidity to sustain them.

Powell can buy time and headlines, and he can even print trillions of more fake fiat dollars to “save the system,” but in the end, it is always the currency which is left dying last on the field.

For those who understand the stubborn math, history and cycles of fiat currencies, the precise timing of such final currency defeats is impossible to predict with precision, but easy enough to see coming, and thus easy enough to prepare for in advance.

Advanced Preparation—The Minority Which Kept Their Heads

Gold, which is an obvious and historically-confirmed weapon (as opposed to barbarous relic) against such open currency destruction, is an equally obvious and historically-confirmed means of achieving such advanced preparation.

Despite such objective facts (and the media-ignored power of gold as an open threat to fiat money), gold makes up only 0.5% of the global investments.

This, it might be said, makes such lonely “gold bugs” crazy, but as alluded to above, sometimes one must keep their heads when all about them are losing theirs.

The question, then, like the title of Kipling’s poem, is not “If” fiat money dies, but “When.”

The former is obvious, the latter is approaching.

Got gold?