Markets are not yet at the tipping point of accepting de-dollarization and capital flight

The services PMI looks robust until you notice the new orders and inventory were due mostly to buying ahead of tariffs. Prices jumped to the highest in over 2 years. So, yes, “resilient economy” but on the cusp of the inflation inherent in the tariffs. We will likely get the same in the trade balance today—a vast rise in imports which is normally a sign of high domestic demand and good GDP growth but contaminated this time by those tariffs.

This is hard-data ambiguity at its best and will not go unnoticed at the Fed, which starts the May meeting today. A mere 4.5% expect a rate cut, according to the CME. Oddly, those expecting a cut at the June meeting is only 28.4% , with 70.4% expecting no change. Apparently the big banks that have forecasted a June cut do not respect the Fed funds futures betting.

Go back and look at that frightful New Taiwan dollar chart. According to Reuters, this is part of a wave of dollar selling by exporters with a giant hoard, in Singapore, South Korea, Malaysia , China and Hong Kong.

“The moves sound a warning for the dollar because they suggest money is moving in to Asia at scale and that a key pillar of dollar support is wobbling. While Tuesday brought a measure of stability, following a stunning 10% two-day leap for Taiwan's currency, Hong Kong's dollar was testing the strong end of its peg and the Singapore dollar has soared close to its highest in more than a decade.”

… “Asia's biggest piles of dollars sit in China, Taiwan, South Korea and Singapore, which combined number in the trillions. In China alone, foreign currency deposits at banks - mostly dollars and mostly held by exporters - were $959.8 billion at the end March, the highest in nearly three years. On top of that are layered investments funded in these currencies, which have low borrowing costs by global standards and investments in U.S. stocks and bonds by pension and insurance funds, which have tended to keep foreign exchange hedges small due to the costs involved.”

In all the long Reuters story, what gives a shudder is this: “Hong Kong's de-facto central bank said on Monday it has been reducing duration in its U.S. Treasury holdings and diversifying currency exposure into non-U.S. assets. Rallies in Asia's bond markets suggests exporters' and long-only money may be coming home, too.” The BNP Paribas strategist in Singapore said "Repatriation talk is becoming reality."

The move is only a few days old so it’s hard to say if Asia is “de-dollarizing.” One analyst called it the “Asian crisis in reverse.”  Washington is silent on the subject but many suspect the US really is seeking dollar devaluation against the Asian exporting countries. The combination of extreme tariffs and forced devaluation, even if the force is imaginary, is economic war. The punishment is the US’ loss of its hoard of foreign capital and ongoing capital inflows that support the US stock and bond market. Trump thinks he wants direct capital to rebuild factories, but can’t get it under such conditions of uncertainty and reckless retribution.

So far, the non-Japan Asian currencies are secondary to the G7 names. But those of us who lived through the Asian crisis and Long-Term Capital are fearful of a replay.

Probably of equal importance is that Canadian PM Carney meets with Trump today. This could result in a big re-balancing of Trump’s attitudes. Oh, to be a fly on that wall!

Forecast

The treatment of semiconductor imports is due to be announced tomorrow or Thursday and could be a big deal for the Asian exporters as well as the US stock market.

TreasSec Bessent told a conference that “Dollar-based assets are the focal point the world turns to… ‘We have the world’s reserve currency, the deepest and most liquid markets, and the strongest property rights.’” Yeah, well, maybe not forever.

Markets are not yet at the tipping point of accepting de-dollarization and capital flight. But it’s coming. All those European countries that want to curb tourism need not worry—later this year when all these chickens come home to roost, Americans will not be able to afford trip to Paris and Venice.

Tidbit: Trump said he doesn’t know if he has to uphold the due process clause of the Constitution. This doesn’t sound related to financial markets, but it is. It’s a cornerstone of the rights of the individual to hold private property. For a government to grab private property without due process—as from some categories of proven criminals—means the government can impoverish anyone it holds a grievance against. And nobody has more grievances than Trump.

This is on top of Trump having sworn an oath to uphold the Constitution, twice, without actually knowing what it says or what is means. Foreign owners of US assets, including reserves held by other sovereigns, need to worry. If Trump goes for selective default, the central bank of China (or Japan, the two biggest holders), would have no recourse to courts. This should remind you of King Henry the 8th expropriating the monasteries.

It’s very, very bad for the reputation of the US. In fact, it would be the ruinous, dragging the US down to the level of a banana republic. As noted before, those countries have to pay a huge premium to peddle their sovereign paper. Turkey: 32.04%. Nigeria: 19.74%. Pakistan: 12.84%. Even S. Africa: 10.89%, and Mexico: 9.41%. 

It’s not just inflation that will drive bond yields up. It’s also this uncertainty over due process. That makes for a double whammy. Fortunately, the one market that can drive Trump to change his mind is the bond market. We saw that in April. Is it doing its job these days? We think not and don’t know why.

Deducing foreign departures (or entries) is awfully hard from prices and yields alone. We assume a rising stock market draws some money away from fixed income but that is not universally true and in any case, which groups are doing that? And do they trade every day? We just don’t know enough about this market. Turns out, nobody else does either, at least not anyone publishing in the widely available press. 

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