In Japan, the Yen is up a bit on comments from BoJ Gov Ueda

In Japan, the yen is up a bit on comments from BoJ Gov Ueda, who said "There was a lot of positive talk on the wage outlook" when the BOJ's regional branch managers met last week. “We will discuss whether to raise interest rates at next week's policy meeting and would like to reach a decision." See the 480-minute chart that illustrates the seesaw action in the dollar/yen as the rate hike idea waxes and wanes. We guess Mr. Ueda is serious this time. If so, expect the dollar to dip to 152-155. In the Chart Package, see the crosses, including yen against the euro and especially the AUD.

Forecast

US inflation not worse is the not the same things as the downward trajectory the Fed claims it needs.

The prospect of Japan raising rates aside, the bond vigilantes are not about to surrender and slink away home. They may be quieted in the UK by better inflation, but that’s not the point—the point is whether taxes need to go up, despite political promises, to rein in the deficit. In the US, we get Trump next Monday for real and the start of whatever mess he is going to make, or at least babble about. There is true fear behind the yields and it seems unlikely Trump will do anything to soothe the savage breast. That means yields will recover to match-and-surpass yesterday’s high, taking the dollar along. We expect a full recovery, and PDQ.

Fun Tidbit: It was the top headline for a while yesterday—the SEC is suing Musk for having cheated Twitter shareholders out of some $150 million by not disclosing he was buying up the shares. The shareholders themselves are also suing.

Sad Tidbit: The special prosecutor’s report on the Trump crimes came out at midnight Monday night and got attention yesterday, even though the cases were dismissed because of Dept of Justice rules. The prosecutor says there was so much evidence that Trump would have been convicted if the case had continued to trial.

In addition, Senators grilled the nominee for the cabinet post at the Dept of Defense and thoroughly exposed him as not morally or professionally fit for any federal office. That doesn’t mean the Republican majority won’t vote him in. We get two more testimonies this week.

Tidbit: Most reports are a little tongue-in-cheek, but Canada promises to retaliate with tariffs on US goods of its own if Trump follows through with his threats. Canada imports more from the US than it exports, but its exports include oil, and that’s “not off the table.”

Aides are making lists that include orange juice and Jack Daniels. Canadian companies are being consulted. Trump’s desire to make Canada the 51st state runs smack-dap into French-speaking Quebec, which doesn’t really want to belong to Canada, let alone the US.

The proposal is insulting and ridiculous at the same time. Mish writes, “I can't shake the feeling that Trump understands there would be serious repercussions to illegally breaking the USMCA treaty crafted by him and signed off by the US Senate. No one could possibly believe Trump in any deal if he broke his own deal.” We do not agree. Trump breaks promises all the time and has no respect for the law, which he evades consistently. Still, we suspect he will get Greenland but not Canada.

Tidbit: Global trade is a lot more complicated than a few data points on winners and losers. The problem can be summed up in one word—China. The near $1 trillion Chinese surplus just reported owes only about one third to the US. Similarly, the US deficit is one-third imports from China.

Other places have it a lot worse. The NYT reports “The European Union, for example, buys $2 worth of goods from China for each $1 of goods that it sells to China. That left the European Union with a $247 billion trade deficit with China last year, while the E.U. ran an estimated $240 billion surplus with the United States. For developing countries, the discrepancies are even more pronounced, except for a handful of exporters of oil and other natural resources that run trade surpluses with China. African nations as a group buy about $3 worth of goods from China for each $2 of goods they sell to China.

“Kenya bought $35 worth of goods last year from China for each $1 of goods that it sold to China. Because Kenya’s trade is roughly in balance with the United States, it has ended up borrowing heavily to raise the money to pay for imports from China and is now heavily indebted, like many developing countries.”

China imports natural resources and raw goods, and 98.9% of exports are manufactured goods. The solution is to get the Chinese people to buy more from its own companies, but rebalancing an economy that big is not going to happen with one of two measures. Top of the list is getting Chinese to save less and consumer more, hard to achieve when so many lost all their savings in the property bust and want to build savings back up. There’s also a 13% sales tax, and a government prioritizing military and security spending.

Bottom line—restructuring is not going to happen in a year or two. Trump has only two years because if history is a guide, he will lose the midterms and both houses of Congress will go Dem. The fly in this ointment is that he can do whatever he likes on tariffs without Congress. But at least Congress will have a bargaining chip. 

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