The big mystery of the day is the decoupling of FX from rates and yields. The ECB will cut and the Fed will not, so why is the euro the one on the upswing? The BoJ is fully expected to raise rates on Friday but the yen is moving down, not up.
If you are looking for what the Big Banks are saying, check out the MaceNews summary of the BoA Global monthly report.
Here’s a summary of the summary: “Global investors pared equity and bond holdings in January, as growth optimism wobbled at the start of 2025… “ A good 8% a weaker global economy ahead when only in Dec almost as many saw stronger growth.
“At the same time, inflation expectations have risen to the highest level since March 2022, with only a net 7% of those polled looking for lower inflation in the coming 12 months.”
As for the hot asset of the month, it’s commodities while paring back other asset types. That includes equities, where those overweight fell from 49% in Dec to 41% in Jan.
A shocking 14% of fund managers think bitcoin will outperform, compared to 21% for global equities. “Sentiment continued to hinge on Federal Reserve rate cut expectations. In January, 79% of those polled looked for the Fed to cut rates in 2025, with a breakdown of 39% saying two cuts, 27% saying one cut and 13% saying 3 cuts. Only 2% of managers expected a Fed hike in 2025.”
Now for the tail risks—what they fear the most: “In January, the top two biggest “tail risks” were “Inflation causes Fed to hike” (41% of those polled) and “trade war triggers global recession” (28%).”
We overlook the survey at our peril. Those surveyed number 214 panelists with $576 billion in assets under management. That doesn’t mean they will be right, but they have a lot more skin in the game than your average commentator.
Forecast
The bond and FX markets have calmed down considerably overnight although some of the charts are hair-curling. See the USD/Chinese gap (Chart Package) and the Canadian dollar 60-miniute chart (below), which is unreadable.
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We find it odd that the FX market is shrugging off the rhetoric that up to this week had been so scary. We’ve had months of doomsday forecasts of inflation/recession and structural turmoil (up to assassination of the Fed).
It appears that FX traders have bought into the theory that tariff threats are only a negotiating ploy and either won’t materialize or will be far less traumatic than the worst case.
We still await the tariff hammer coming down on our heads. Yesterday Trump spoke of imposing the 25% tariff on Canada and Mexico because they abuse the border (sending illegals and Chinese drugs into the US). He also pardoned the founder of the drug-dealing Silk Road website. Consistency is not a strong suit.
A 25% tariff on the border countries but 10% on China is not easy to grasp because it’s not reasonable. This odd combination of threats feeds the idea he is “negotiating.”
The result is a drop in perception of risk. Another point is also the drop in US yields (and there is a 20-year auction today). A third factor is the Fed almost certainly making no rate change at the Jan policy meeting. Since it is clear the ECB will be cutting while the Fed will not, it’s counter-intuitive for the euro to be on the rise.
We say nonchalance on the tariff issue is not justified. It may well be true this is a negotiation and how others respond to bullying will determine who gets the hammer. But tariffs and tariff consequences there will be. We need to wait for the “sophisticated” to appreciate the true situation and the literal-minded to regain the reins.
Tariff tidbit: Canada is not alone in building a retaliation tariff list—the eurozone has got one, too. Yesterday Trump called for tariffs on the “very, very bad” European Union.
Bloomberg writes “But some officials in Brussels believe that trade disputes will mostly be transactional and there are deals to be done eventually. Trump has hinted, for example, that he wants to see the EU buy more American oil and gas.”
Where real contention will lie is in tech regulation, where the EU already has had a slew of cases against big US tech and has imposed big fines. It likes fact-checking on social media, for example.
Fun point: The WSJ has finally acknowledged that cheap Canadian oil is on the table. Everybody else saw it long ago.
Disgrace of the day: The White House ordered all federal employees in diversity, equity and inclusion roles to be placed on leave– go home tonight and don’t come back.
Tidbit: It’s Davos time again. Once upon a time, Davos delivered Big Ideas and plenty of ideals. Then it became an ego-fest and lost traction. Bloomberg writes “Davos Man, the loaded term for World Economic Forum attendees, loves big ideas. This year, there’s a new one: embrace Donald Trump, and fast.
“When the incoming US president left the scene after his first term in office four years ago, there was a collective sigh of relief from the global elite that gathers annually in the Swiss mountain resort.
“Now, with the 2025 meetings kicking off on the same day that Trump takes office, executives are rushing to falling into line…”
Tidbit: The correlation of a currency pair to the rate or yield differential is sometimes super-high and then at other times, a lot less. A newsletter named The Daily Shot from the WSJ offers bits and bobs from various sources, most of which are not available to you and me. This time it has two charts from something named Codera that shows the currency effect of short and long term differentials is trivial in most cases. The currency sensitivity to yields is not statistically significant for sterling, euro, CAD, AUD, peso, etc.
We never argue with statisticians but golly. Go tell that to Liz Truss. And Bloomberg, Reuters, et al.
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