Month: November 2024

After yesterday’s in line – but really cooler than whispered – CPI which restored hope in a December rate cut, all eyes are on this morning’s PPI print to boost dovish hopes that the Fed’s easing cycle would remain on track. It was not meant to be, however, as the PPI came in hotter than expected across the board on both a monthly and annual basis.

Starting at the top, headline PPI rose 0.2% MoM (in line with the +0.2% expected) but September was revised higher from 0.0% to 0.1%; meanwhile on an annual basis, headline PPI rose 2.4%, higher than the 2.3% expected, with the last month also revised higher from 1.8% to 1.9%.

Unlike last month when a drop in energy prices weighed heavily on the headline PPI number, this month energy subtracted just 0.02% from the final print, the lowest detraction since July. Meanwhile, Services added a hefty 0.179% to the bottom line number.

Indeed, according to the BLS, most of the rise in final demand prices can be traced to a 0.% advance in the index for final demand services. Prices for final demand goods inched up 0.1%, the first increase in the index since July.

Taking a closer look at the components:

Final demand services: The index for final demand services increased 0.3 percent in October after rising 0.2 percent in September. Over three-fourths of the broad-based advance in October is attributable to prices for final demand services less trade, transportation, and warehousing, which moved up 0.3 percent. The indexes for final demand transportation and warehousing services and for final demand trade services also increased, 0.5 percent and 0.1 percent, respectively. (Trade indexes measure changes in margins received by wholesalers and retailers.)

Product detail:

• Over one-third of the rise in the index for final demand services can be traced to prices for portfolio management, which advanced 3.6 percent. The indexes for machinery and vehicle wholesaling; airline passenger services; computer hardware, software, and supplies retailing; outpatient care (partial); and cable and satellite subscriber services also moved higher.
• In contrast, margins for apparel, footwear, and accessories retailing fell 3.7 percent. Prices for securities brokerage, dealing, investment advice, and related services and for truck transportation of freight also declined.

Final demand goods: The index for final demand goods inched up 0.1 percent in October following two consecutive decreases. The advance can be traced to a 0.3-percent rise in prices for final demand goods less foods and energy. Conversely, the indexes for final demand energy and for final demand foods declined 0.3 percent and 0.2 percent, respectively.

Product detail:

• An 8.4-percent increase in the index for carbon steel scrap was a major factor in the advance in prices for final demand goods. The indexes for meats, diesel fuel, fresh and dry vegetables, and oilseeds also moved higher.
• In contrast, prices for liquefied petroleum gas fell 18.1 percent. The indexes for chicken eggs, processed poultry, and ethanol also decreased.

Even more problematic for the doves, however, is that core PPI jumped to +3.1% YoY (hotter than the 3.0% exp) with the prior month revised higher to 2.9% from 2.8%. This was the second hottest print going back to March 2023 with just the June outlier surge hotter than October…

… as sticky Services costs continue to rise.

The hotter than expected PPIs have pushed yields and the dollar higher, even as the market waits to see the details of what impact today’s numbers will have on the Fed’s preferred core PCE metric – according to UBS key PPI components to PCE look hot – although Bloomberg noted a big jump in air passenger services (3.2%), which suggests some upside risks (i.e., 0.3% core PCE).

The most notable takeaway from the data appears to be the increase in final demand for services in October, which is similar to the factors that increased CPI yesterday — shelter, food and energy, which are components the Fed cannot control with interest rates.

Bottom line: this is a long way from the Fed’s mandated 2%, and it’s moving in the wrong direction, something which has not been lost on the market, where Treasury curves are flattening after the data, which suggests traders are wavering over the prospects of a December rate cut. That has yet to be reflected in rates markets — bets have been trimmed but marginally, not enough to really change the swaps market outlook as of now. According to BBG’s Vince Cignarella, sizeable block trades are going through Treasuries, mostly in the five-year tenor and some ten-year tenors, which looks like positioning for higher yields and flatter curves.

Authored by Zachary Stieber via The Epoch Times (emphasis ours),

U.S. District Judge Algenon Marbley will remain an active judge, he has informed the White House, reversing earlier plans to retire.

Marbley informed the White House of the reversal following President-elect Donald Trump’s win, the judge’s chambers confirmed to The Epoch Times.

Marbley, who was appointed under President Bill Clinton, said in October 2023 that he would move to senior status once President Joe Biden picked his successor.

Judges with senior status can still hear cases but typically have a lower workload. The status is known as semi-retirement. When judges move to senior status, the president nominates a successor, who will go on active duty.

Biden never nominated a successor.

“A successor has not been confirmed, and I have therefore decided to remain on active status and carry out the full duties and obligations of the office,” Marbley told the White House in a letter after Trump’s win, news outlets reported.

Senior status can be taken by judges who are 65 years of age or older and have served at least 15 years on the bench. There is no mandatory retirement age for federal judges, and they are not required to take senior status.

Beginning in the Bush administration in 2001, the majority of judges retiring during a presidential term were appointed by the same party as the sitting president, research has found. In the first two years of the Biden administration, 65 percent of the judges taking senior status were appointed by Democrats.

“Non-political alternative explanations—such as judicial capacity and caseloads, the financial benefits of going senior, and the presence of cross-party appointments—simply cannot sufficiently explain recent trends,” Northwestern Pritzker School of Law professor Xiao Wang, who conducted the research said.

The move by Marbley, who was sworn in on Nov. 10, 1997, means there will be no vacancies for Trump to fill at the U.S. District Court for the Southern District of Ohio.

Four of the eight judges on the court were nominated by Trump in his first term. One was nominated by Biden.

Two-hundred and thirty-eight of Trump’s judicial nominees received confirmation in his four years in office, including 174 U.S. District Court judges.

The Senate has confirmed 213 judges nominated by Biden, with several months left in his term.

There are currently 47 vacancies on the federal bench, with 17 Biden nominees pending confirmation.

In addition to Marbley, 19 other judges have said they will move to senior status or fully retire pending a successor being confirmed.

US equity futures have reversed the weakness of the prior two days and are higher, led by small caps as bond yields stabilize after the recent rout sent the 10Y yield to 4.45%. As of 8:00am ET, S&P and Nasdaq futures are up 0.1%, as investors wait to see if upcoming price data and a speech from Jerome Powell will boost expectations for a December interest-rate cut. Mag7 stocks mixed, but Semis have caught a bid after falling 6.3% over the last four sessions: as JPM puts it the pair trade of long Software vs. short Semis is +14.5% over the last 5 sessions. Treasury yields ticked lower, after Wednesday’s CPI data kept alive the hope of a December rate cut; however, Trump trades keep on trucking and the dollar index extended its rally on track for its 7th consecutive weekly gain and the strongest gain since April 2022 while Bitcoin traded at about $91,000, holding close to Wednesday’s record high. Commodities are lower but WTI is flat despite an IEA report of a more than 1 million barrel oversupply in 2025, driven by weaker Chinese demand. Today’s macro focus is on Jobless data and PPI, the latter to seek confirmation of CPI trends from yesterday. There are four Fed speakers today, including Jerome Powell himself.

In premarket trading, Cisco Systems fell after the networking company firm gave a conservative outlook, while Nu Holdings dropped after the fintech company reported third-quarter net interest income that missed consensus estimates. Disney jumped more than 10% after posting fiscal fourth-quarter sales and profit that beat Wall Street estimates and forecast earnings growth for the next three years. Here are some of the biggest US movers before the opening bell:

• Advance Auto (AAP) drops 7% after posting net sales for the quarter that missed the average analyst estimate. The company plans to close about 500 stores.
• Beazer Homes (BZH) jumps 5% after the homebuilder reported quarterly revenue that beat the average analyst estimate.
• Capri Holdings (CPRI) falls 5% and Tapestry (TPR) gains 6% after the pair ended an $8.5 billion plan to merge following a US court order freezing the deal due to antitrust regulators’ objections.
• CNH Industrial (CNH) rises 4% after David Einhorn revealed a new position in the farm equipment company.
• Harrow (HROW) sinks 21% after the eye-care pharmaceutical company reported revenue and core earnings for the third quarter that disappointed.
• Ibotta (IBTA) drops 22% after the cash-back mobile app company provided a fourth-quarter outlook that trails analyst estimates.
• Sonos (SONO) rises 5% as the home speaker company reported a largely in-line quarter as it navigates through the customer backlash over its recent app update.
• Zeta (ZETA) rises 9% after the software company announced a $100 million share buyback, setting the stock up for a rebound from two days of heavy losses following a short call.

Investors are trying to balance a picture of easing inflation and falling rates against the possibility that President-elect Donald Trump will implement hardline pledges on taxes and tariffs, reigniting price growth next year. Confirmation of a Republican election clean sweep suggests more policy leeway for Trump and limits potential curbs on his power.

“We are seeing that there is a bit more discrimination between Trump trades,” said Amelie Derambure, senior multi-asset portfolio manager at Amundi. “There is expectation that Trump’s policies will be market friendly, growth friendly, will be impacting higher inflation but not massively, deregulation is going to be good for some sectors,” she said. “The assumption is we have good, soft Trump with no big negative impact priced by markets.”

Traders’ eyes will now be on US PPI data which is expected to show headline and core producer prices rose year-over-year in October. Fed chief Jerome Powell is also due to speak later in the day.

European stocks reversed the recent rout as the Estoxx 50 advanced 1.4% over the early London session, supporting S&P futures. German industrial giant Siemens was the most significant outperformer, rising to a record high after a reassuring earnings print. France’s Alstom made a similar move, rallying on strong results. Among the biggest laggards, Merck KGaA slipped on weak sales and Stadler Rail plunged on a profit warning. Communication services and tech sectors lead gains after a pair of bullish outlooks from chip-equipment maker ASML Holding NV and German industrial giant Siemens AG, lifted the Stoxx 600 index by about 0.8% while the German DAX outperforms with a 1.2% gain. Here are the biggest movers Thursday:

• Siemens shares jump as much as 9%, hitting a record high, as analysts laud the German industrial group’s strong 4Q report, calling it a solid print amid macroeconomic challenges
• Burberry gains as much as 16% after the luxury-goods maker’s retail comparable sales for the first half surpassed expectations, with analysts particularly positive on the new CEO’s strategy
• Monte Paschi rises as much as 15% after Italy sold a 15% stake to investors including rival Banco BPM, Anima; Banco BPM meanwhile rises as much as 3.9% after buying a stake in Monte Paschi
• ALK-Abello gains as much as 8%, the most since August, after the Danish allergy drugmaker reported forecast-beating 3Q earnings, driven by solid tablet sales growth in the European market
• Alstom rallies as much as 8.1%, the most since May, with analysts viewing its results as a small beat and Citi highlighting probable relief after nervousness among investors ahead of the print
• Embracer shares rise as much as 12% as the Swedish gaming company’s plan to sell its Easybrain unit for $1.2 billion allowed analysts to look past its weak results and guidance
• 3i Group advances as much as 5.1%, the most in almost eight months, following the UK-listed private equity group’s first-half results. Analysts note the strong performance by Action division
• Stadler Rail plummets as much as 16%, the most on record and hitting a new low, after issuing a profit warning following a series of natural disasters, including floods in Valencia
• Merck KGaA shares slip as much as 2.4% to the lowest since July 19 after the German company reported third-quarter sales and earnings for the electronics business that missed estimates
• Shares in precious metals mining companies slid to two-month lows as a rallying dollar knocked gold prices lower for the fifth straight day, with bullion falling 1.2% in morning trading in Europe
• SMA Solar shares fall as much as 21% to their lowest in almost 10 years after the German renewable energy equipment manufacturer lowered its FY24 revenue and Ebitda guidance
• Capita shares drop as much as 7.8% after the outsourcing specialist was downgraded at Shore Capital. The broker sees Capita taking a hit from changes to national insurance contributions in the UK
• Swiss Re falls as much as 2.2% after the Swiss insurance group reported nine-month figures that were overall in line with pre-announced figures. The company’s Life & Health arm was a key disappointment

There was no bounce in Asia, where stock fell again, extending losses to the fifth straight session, as they were weighed by selling in Chinese shares and the region’s tech companies. The MSCI Asia Pacific index declined as much as 0.8%, with Chinese internet companies Alibaba Group and Meituan among the biggest laggards. A gauge of Chinese technology companies in Hong Kong lost more than 20% from its recent high. Chipmakers in the region also slipped, led by South Korea-based SK Hynix. Shares closed lower in mainland China and Hong Kong, where the market was open despite typhoon warnings. Investors are still watching for further measures from Chinese authorities to boost the world’s second largest economy, while monitoring President-elect Donald Trump’s cabinet appointments. In its latest steps, Beijing moved to cut taxes for homebuyers and developers. Stock benchmarks also dropped in Taiwan and Japan. Risk sentiment in the region took a hit as the dollar and US Treasury yields edged higher in Asian trading. Tencent Holdings’ shares fell 0.1% despite a 47% surge in quarterly profit and describing tentative signs of a Chinese economic bounce-back. Among other key China tech results, Meituan and JD.com are due to report later Thursday. Later this week, traders will also watch for Alibaba’s earnings, as well as Japan’s GDP figures and China’s retail sales.

Meanwhile, in FX the likelihood of so-called America-First policies has boosted the dollar more than 2% so far this month. Its gains are weighing on a raft of assets, sending gold prices near two-month lows and pushing the yen to the weakest since July, close to levels when Japanese authorities last intervened to prop up the currency. The dollar extended its rally versus major peers, follows confirmation of a Republican election sweep. Bloomberg Dollar Spot Index is up for a fifth day, 0.3% higher into early US session. The euro dropped as much as 0.5% to touch the lowest in more than a year, while MSCI’s index for emerging market currencies fell for a fifth day. USD/JPY was back above 156.

Analysts at BBH said that with Trump likely to have the wherewithal to carry out his agenda, the scope for rate cuts could be limited going forward. “Market pricing for the Fed has already adjusted, which is giving the dollar a huge lift,” they wrote, advising that “investors should continue to lean into dollar strength.”

Currently, money markets price around 19 basis points of rate cuts for December and several policymakers have urged a cautious approach. Fed Governor Adriana Kugler, for instance, said on Thursday that rate cuts should be paused if progress on inflation stalls.

In rates, treasuries are marginally richer across the curve with futures pushing higher into the early US session, unwinding losses seen at the start of Asia. The curve has held Wednesday’s sharp steepening move, which saw the biggest one-day widening move in the 5s30s spread so far this year. Treasury yields are slightly lower on the day across the curve, although remain within a couple of basis points of Wednesday’s close, while spreads broadly trade within one basis point of prior day. US 10-year yields trade around 4.44%, with bunds outperforming by 1.5bp and gilts slightly lagging in the sectoras traders added to their ECB interest-rate cut bets, boosting shorter-dated German bonds. German two-year yields fall 3 bps to 2.14%. US data includes PPI and weekly jobless claims.

In commodities, oil prices are steady, with WTI near $68.40 a barrel after the IEA said markets face a surplus of more than 1 million barrels a day next year. Spot gold falls another $26 to $2,546/oz. Bitcoin rises 3% and above $91,000.

On today’s calendar, the main event will be a speech by Fed Chair Powell on the economic outlook. A text release at 3pm New York and a Q&A session is expected. US economic data calendar includes October PPI and initial jobless claims (8:30am). Fed speaker slate includes Kugler (7am), Barkin (9am), Powell (3pm) and Williams (4:45pm).

Market Snapshot

• S&P 500 futures little changed at 6,021.25
• STOXX Europe 600 up 0.5% to 504.25
• MXAP down 0.8% to 181.24
• MXAPJ down 0.8% to 574.03
• Nikkei down 0.5% to 38,535.70
• Topix down 0.3% to 2,701.22
• Hang Seng Index down 2.0% to 19,435.81
• Shanghai Composite down 1.7% to 3,379.84
• Sensex down 0.2% to 77,554.04
• Australia S&P/ASX 200 up 0.4% to 8,223.95
• Kospi little changed at 2,418.86
• German 10Y yield little changed at 2.40%
• Euro down 0.4% to $1.0520
• Brent Futures down 0.2% to $72.16/bbl
• Gold spot down 1.0% to $2,546.97
• US Dollar Index up 0.38% to 106.88

Top Overnight News

• USD strength piled more pressure on Asian stocks and currencies, with the yen slipping to its lowest level since July. Fears of imminent intervention are overstated, MLIV said. China supported the yuan for a second day. BBG
• The BOJ should raise interest rates at least to 1% to roll back an “abnormally” huge stimulus that is causing unwelcome falls in the yen, said Takeshi Shina, the shadow finance minister of the country’s largest opposition party. Reuters
• A close aide to Prime Minister Benjamin Netanyahu told Donal Trump and Jared Kushner this week that Israel is rushing to advance a cease-fire deal in Lebanon, according to three current and former Israeli officials briefed on the meeting, with the aim of delivering an early foreign policy win to the president-elect. Washington Post
• Ukraine sovereign bond values spike as investors anticipate the incoming Trump administration will push for a quick end to the war. FT
• Global oil markets face a huge surplus of more than 1 million barrels a day next year on faltering Chinese demand, and even with the curtailed supply from OPEC+, the IEA said. Supplies from producers such as the US and Canada will surge by 1.5 million b/d. BBG
• ASML reaffirmed its bullish long-term revenue outlook on AI-driven demand, projecting sales in 2030 of up to €60 billion. Shares rallied. BBG
• Howard Lutnick and his allies are lobbying for him to be picked as Treasury secretary, as some advisers to President-elect Donald Trump quietly signal skepticism about the top contender, investor Scott Bessent. WSJ
• The incoming Trump administration is considering a plan to bypass Congress and unilaterally adopt some of the Musk/Ramaswamy spending cut proposals. Washington Post
• Pennsylvania Senate seat race will be subjected to a recount after the vote result was within the threshold for an automatic recount under state law, according to NBC.
• Disney Beat in FY4Q EPS and revenues with slight operating income miss; constructive FY25 adj EPS guide of HSD, well above expectations of 4%; Stock is trading +10% thus far in the premarket

A more detailed look at global markets courtesy of Newsquawk

APAC stocks were mostly subdued following the indecisive lead from Wall Street where stock markets were choppy after in-line CPI data and continued ‘Trump trade’ flows, while there was a lack of fresh major catalysts to drive price action. ASX 200 gained as strength in Tech and Financials picked up the slack from the weakness in the commodity-related sectors but with the upside capped by disappointing jobs data. Nikkei 225 wiped out all of its initial gains and returned to beneath the 39,000 level despite a weaker currency. Hang Seng and Shanghai Comp remained pressured despite the lack of fresh catalysts and ahead of tomorrow’s activity data with weakness seen in property stocks, while tech names are mixed ahead of key earnings, although Tencent was an early outperformer in Hong Kong after its quarterly results beat estimates on the bottom line.

Top Asian News

• China reportedly armed itself for a potential trade war with Trump as Beijing has enacted sweeping laws since the US President-elect’s first term that would allow it to retaliate if threatened, according to FT.
• Japan is planning a JPY 13.5tln extra budget to fund the stimulus package with PM Ishiba looking to finalise the stimulus package on November 22nd, according to Sankei.
• NetEase (9999 HK) Q3 Revenue (USD) 3.7bln (exp. 3.65bln).

European bourses hold a positive bias, with only a couple of indices residing in the red. Indices opened mixed/modestly firmer and sentiment gradually improved into the morning; indices generally reside at highs. European sectors hold a positive bias vs initially opening mixed. Tech is by far the clear outperformer, lifted by strength in ASML (+4.5%) after it reiterated its 2030 sales outlook. Healthcare resides at the foot of the pile, with Merck (-2.4%) weighing on the sector. Basic Resources is also incrementally in negative territory, with underlying metals prices hit by the continued strength in the Dollar. US equity futures are modestly firmer across the board, but with slight outperformance in the RTY as it attempts to pare back the hefty losses seen in the prior session.

Top European News

• UK Chancellor Reeves is planning on introducing pension legislation changes to create a series of “megafunds” by pooling pension savings, according to Bloomberg.
• ECB’s de Guindos says has seen good news recently on inflation, but not so good for economic activity. Says inflation has come down quite a lot, all indicators on core inflation are heading in the right direction. Recent data on prices heading towards 2% goal. If inflation converges towards the goal, monetary policy will respond accordingly.
• German VDMA Engineering Association sees 1.5% revenue growth in China for German engineering companies in 2024

FX

• DXY’s bull run since the election has continued into today’s session with the DXY up around 3 handles since election day. Just above the 107.00 mark at best, if the move continues the 2023 high sits at 107.35. Today’s data slate sees the release of US PPI which will be used as an input for PCE. Fed speak includes Powell, Barkin, Williams & Kugler.
• EUR/USD’s recent run of losses has extended with the pair slipping further onto a 1.05 handle with a current session low at 1.0507 (fresh YTD low). The next obvious target for the pair is 1.05. If cracked, the 2023 low sits at 1.0448. Looking ahead for the Eurozone, ECB’s Lagarde and Schnabel are due to speak.
• JPY is softer once again vs. the broadly stronger USD. In terms of fundamentals for Japan, reports suggest that the nation is planning a JPY 13.5tln extra budget to fund its stimulus package. However, this has done nothing to turn the tide for the pair.
• GBP lower vs. the USD for a 5th consecutive session. For now, this remains more of a USD story rather than one of pure GBP weakness. Today’s UK data slate is light. However, BoE’s Mann and Bailey are due to speak.
• Both antipodes are softer vs. the USD with AUD in focus following slightly softer-than-expected jobs data overnight. That being said, the release is unlikely to force the hand of the RBA into cutting rates in the immediate future.
• PBoC set USD/CNY mid-point at 7.1966 vs exp. 7.2326 (prev. 7.1991).

Fixed Income

• A slightly softer start to the session with USTs at a fresh 109-06 contract low. Yields bid across the curve with the belly leading and a very slight flattening bias overall. Docket ahead has PPI and IJC, which could spur reactions given the relevance for PCE and insight into the labour-side of the Fed’s mandate respectively. Thereafter, markets will await Fed Chair Powell and then Williams.
• Bunds are in the red but well off worst levels, currently near a 131.79 peak having bounced from an early 131.28 trough, a low which printed overnight when newsflow was light. The second read of EZ GDP figures were unrevised, whilst the Employment figures were revised slightly higher; metrics which ultimately had little impact on price action.
• Gilts are underperforming, holding above the 93.00 mark currently but did go as low as 92.97 just after the open. Specifics for the UK are somewhat light, aside from a lot of press focus on Reeves’ upcoming speech on pension reform; on the subject of speakers, BoE’s Bailey is also on the Mansion House docket but before that we expect a text release from Mann.

Commodities

• Crude is subdued and in choppy trade but within tight ranges amid a lack of macro catalysts but with eyes on the ever-evolving geopolitical landscape. Brent Jan trades between a USD 71.79-72.46/bbl range.
• Pressure seen across all precious metals as the Dollar continues to ramp higher as DXY rises further above 106.50 to levels closer to 107.00.
• Hefty losses across the board for base metals amid the ongoing USD strength and potential implications from protectionism under a Trump admin.
• IEA OMR: raises 2024 world oil demand growth forecast to 920k BPD (prev. 860k BPD); 2025 forecast at 990k BPD (prev. 1mln BPD); says China is the main drag on global oil demand growth; Chinese demand contracted for a sixth straight month in Oct.
• Private Inventory Data (bbls): Crude -0.8mln (exp. +0.1mln), Gasoline +0.3mln (exp. +0.6mln), Distillate +1.1mln (exp. +0.2mln), Cushing -1.9mln.
• South African Mining Production YY (Sep) 4.7% vs. Exp. 2.2% (Prev. 0.3%); Gold Production YY (Sep) -3.7% (Prev. -4.6%)

Geopolitics

• “Syria reports the activation of the air defense system against a UAV in southern Homs in central Syria”, according to Israel Radio Correspondent
• Iranian Foreign Minister Araqchi says Iran is ready to negotiate based on it’s national interests & inalienable right
• Israeli army warned of striking buildings in Haret Hreik and Burj al-Barajneh in the southern suburbs of Beirut, while it was later reported that Israeli warplanes attacked Beirut’s southern suburbs.
• Iraqi armed factions said they attacked a vital target in northern Israel with drones, according to Sky News Arabia.
• White House said US President Biden reinforced the need to back Ukraine in the meeting with President-elect Trump.

US Event Calendar

• 08:30: Oct. PPI Final Demand MoM, est. 0.2%, prior 0%
  • Oct. PPI Final Demand YoY, est. 2.3%, prior 1.8%
  • Oct. PPI Ex Food and Energy MoM, est. 0.2%, prior 0.2%
  • Oct. PPI Ex Food and Energy YoY, est. 3.0%, prior 2.8%
• 08:30: Nov. Initial Jobless Claims, est. 220,000, prior 221,000
  • Nov. Continuing Claims, est. 1.87m, prior 1.89m

Fed Speakrs

• 07:00: Fed’s Kugler Speaks on Economic Outlook
• 09:00: Fed’s Barkin Discusses Economy in Fireside Chat
• 15:00: Powell Speaks on Economic Outlook in Dallas
• 16:45: Fed’s Williams Speaks at NYFed Event

DB’s Jim Reid concludes the overnight wrap

The past 24 hours saw investors growing more confident about a December rate cut after US CPI was in line with expectations. Admittedly, the report wasn’t actually that good compared with some recent months, as monthly headline CPI was the fastest in six months, and core CPI was still a bit faster than the Fed would ideally like. This helped to reassure investors that the Fed was still on a path towards at least a cut in December, but long-end yields rose to multi-month highs, as fears about upcoming tariffs and a potential re-acceleration of inflation lingered. The S&P 500 (+0.02%) was little changed, some but other “Trump trades” prevailed with the dollar rising to its highest in over a year and Bitcoin reaching at an all-time high of $93,413 in the US session yesterday. It was as low as $52,598 on September 6.

In terms of the details from the report, core CPI was at a monthly +0.28% in October (vs. +0.3% expected), so markets were relieved we didn’t get the +0.4% print some had feared. That said, it wasn’t all good news, as that’s the third consecutive reading which rounds to +0.3%. So the 3-month annualised rate of core CPI now stands at +3.6%, up from just +1.6% three months ago, when it felt like inflationary pressures were a lot more tame and the Fed were pivoting towards their 50bp rate cut in September. In the meantime, headline CPI was also broadly as expected at +0.24% (vs. +0.2% expected), but it wasn’t far from rounding up to +0.3% as well, and it was also the fastest headline CPI print since April. In turn, that pushed the 3m annualised rate up to +2.5%, whilst the year-on-year rate ticked up to +2.6%, ending a run of six consecutive monthly declines in the annual rate.

Nevertheless it could have been worse and investors dialled up the chance of the Fed cutting rates again at the December meeting, with futures now giving that an 82% probability. That was down to 59% just before the release, so there was a meaningful rise intraday. In turn, that led to a decent rally in front-end Treasuries, with the 2yr yield down -5.4bps on the day to 4.29%. However, 10yr yields rose +2.3bps to 4.45%, their highest since the start of July, and rising nearly 10bps from their intra-day low in the hour or so after the CPI release. And 30yr yields (+6.8bps) rose to their highest since May, with the 2s30s slope seeing its sharpest steepening YTD. There wasn’t a single clear driver for the long-end sell-off with strong corporate issuance so far this week potentially playing a role, while the “Trump trade” factor again appeared to dominate. Overnight, 2yr (+2.8bps) and 10yr USTs (+2.0bps) are trading at 4.313% and 4.471%, respectively, as we go to print.

In terms of post-election news, a Republican sweep was confirmed yesterday as the party has now secured 218 of the 435 seats in the House of Representatives, with nine seats still to be called. We also had further news on Trump’s cabinet picks, with Trump confirming senator Marco Rubio as his nominee for Secretary of State and nominating representative Matt Gaetz for Attorney General. However, we are still waiting on names for most of the key economic positions, including Treasury Secretary, Commerce Secretary and US Trade Representative.

Looking at the Fed, there was a fair amount of commentary from officials yesterday. For instance, Minneapolis Fed President Kashkari said that “I think that inflation is headed in the right direction”, and Dallas Fed President Logan said that “I think it behooves us to proceed cautiously at this point”. This tone of heightened uncertainty was echoed by Kansas City Fed President Schmid, who said that “it remains to be seen how much further interest rates will decline or where they might eventually settle”, while St Louis Fed President Musalem commented that officials should assess incoming data “judiciously and patiently”.

Even as investors grew more confident about a December rate cut, the US Dollar continued its relentless move higher yesterday. In fact, the dollar index (+0.43%) closed at its highest level in over a year, whilst the euro closed at a one-year low of $1.0569. To some extent, that could be explained by the fact that even as front-end nominal yields were moving lower, longer-dated real yields actually hit their highest in months. That included the 10yr real yield, which was up +2.5bps to a 4-month high of 2.09%, and the 30yr real yield (+6.0bps) also hit a 5-month high of 2.32%.

Meanwhile for equity markets, there was a fairly steady performance yesterday, with the S&P 500 (+0.02%) little changed. Tech stocks underperformed, with the NASDAQ (-0.26%) falling back and the Philadelphia Semiconductor index (-2.00%) posting its fourth decline in a row. Over in Europe, the story was also one of small moves in either direction, with the STOXX 600 (-0.13%) closing at a three-month low.

Elsewhere in Europe, sovereign bonds struggled a touch, with yields on 10yr bunds (+2.6bps) and OATs (+1.9bps) moving higher. Interestingly, that came as the CDU/CSU chancellor candidate Friedrich Merz, suggested he was open to reform of the debt brake yesterday. So that could open up the door to a potential fiscal expansion, and DB’s chief German economist Robin Winkler put out a note on this yesterday (link here), where he points out that Merz’s comments offer room for manoeuvre in potential coalition talks after the election, even if it remains unlikely that the CDU/CSU would endorse more debt-financed investment during the election campaign. Clearly, there’s also the question as to whether the electoral arithmetic would allow for a change in the constitution, as that would require a two-thirds majority. But he thinks there is a growing probability of a meaningful fiscal expansion after the election.

Asian equity markets are mixed this morning but with the Hang Seng (-1.47%) leading losses on tariff fears and with the Shanghai Composite (-0.86%) being pulled lower by property and tech stocks. Elsewhere, the KOSPI (+0.09%) is hanging onto gains but the Nikkei (-0.20%) has slipped lower as I’ve been typing, even with the Japanese yen (-0.37%) sliding for the fourth consecutive day, dropping to fresh multi-month low of 156.08 against the dollar. This decline has brought the yen closer to levels where Japanese authorities last intervened to support their currency. US futures are down around a tenth of a percent.

Early morning data showed that Australia’s unemployment rate remained steady at 4.1% for the third consecutive month in October as the number of employed people increased by 15,900. Economists had believed employers would add a net 25,000 jobs in October. Meanwhile, there is a slight drop in the participation rate from a record 67.2%, edging down to 67.1% in October.

To the day ahead now, and we’ll hear from plenty of central bank speakers, including Fed Chair Powell, the Fed’s Kugler, Barkin and Williams, ECB Vice President de Guindos, the ECB’s Schnabel, BoE Governor Bailey, and the BoE’s Mann. We’ll also get the ECB’s account of their October meeting. And US data releases include PPI for October and the weekly initial jobless claims. Lastly, earnings releases include Walt Disney.

A Republican sweep has been priced into core markets – stronger US equities, higher Treasury yields, and a more robust dollar – largely pressuring emerging market equities and currencies lower. This time, President-elect Trump is expected to hit China with a barrage of tariffs early in his administration.

Given tariff risks and trade uncertainty, emerging market equities have been sliding as Trump’s projected protectionist trade policies, higher rates, and stronger dollar imply a negative macro backdrop for EM assets. 

On Thursday, Bloomberg’s Sebastian Boyd published a list showing Trump’s tariff risks and trade uncertainty represent a negative growth hit for the rest of the world… 

• President-elect Donald Trump’s campaign promises suggest that second-term tariffs may be very different from those in his first term — broader, steeper. Their impact will be complex and much will depend on how other countries and the EU respond. But we can extrapolate from history and make some assumptions.

• First, tariffs aren’t close to priced in yet. If Trump proceeds with what he’s vowed to do, we will see steep declines in emerging-market stocks and currencies. Equities in more developed countries will also fall, especially in Asia. Health- care stocks and US financials seem to be the best place to shelter.

• Tariffs are an inflationary tax on US imports. They push up prices, but also inflation expectations and Treasury yields. They will have negative effects on US companies and consumers, but we can assume that they will be tailored to minimize those effects.

• The impact of tariffs, even highly tailored ones, is likely to be strongly negative outside the US. After tariff announcements in Trump’s first term, the dollar gained and emerging-market currencies and stocks fell, steeply in some cases. And the negatives rolled out beyond just the targeted countries and industries.

• However, retaliatory tariffs from other countries may also be targeted to produce maximum inconvenience for the US, especially in industries like soy-farming that are strong in Trump-voting areas.

• Trump’s early experiments with taxing imports were gradual. He started with solar panels and washing machines. Then in March 2018, he imposed tariffs on steel and aluminum from a list of countries which he later expanded. 

• To measure the impact of those tariffs, I merged the S&P 500, Stoxx 600, MSCI Emerging Markets and MSCI Asia Pacific indexes, then removed the smallest 10% of companies by market capitalization, to create a universe of more than 2,000 names. I then measured share-price performance for the three- and six- month periods starting on the last day of February 2018.

• Chinese stocks saw steep losses. There are more than 400 Chinese stocks in my sample, and 38 of 59 industry sub-sectors fell in the first six months amid concerns that the trade war would widen. Chinese retailers and automakers were among the worst-affected, with a median decline of more than 30%, while apparel & textile products and medical equipment & devices escaped.

• There was a lot of collateral damage. In the interests of legibility, the chart above shows the 15 largest countries in our sample. Elsewhere, Turkish stocks fell a median 52% in the six months through August 2018. South Africa and Indonesia also had steep losses.

• In April 2019, Trump threatened a tariff on cars made in Mexico. In June, he backtracked, claiming the threats had worked. In the meantime though, the median loss on Mexican stocks was 16%. The median US stock in the sample slid 0.9%. The S&P 500 oil & gas index fell 10%.

• At the start of May that year, Trump’s administration announced tariffs on $200 billion of Chinese goods. This time the impact was more limited than it had been in 2018. Over the next three months, Chinese stocks fell a median 7.8%, then bounced back to eke a median 0.6% over a six-month period.

In a separate note, Goldman’s Tadas Gedminas and Teresa Alves told clients last week…

• This time around our expectation is that tariffs against China could be implemented relatively early in the administration, which would likely pose a challenge next year. But our prior work suggests that the market struggles to price this risk ahead of time, with most of the tariff-related price response taking place around actual announcements (as was primarily the case for CNH). This suggests that the market could still maintain the latest price action despite prevailing risks.

Since last Tuesday, the dollar has reigned supreme, while emerging markets and global stock ex-US have slipped into negative territory. 

EM asset underperformance will persist as long as the dollar remains strong. 

Authored by Ron Paul via The Ron Paul Institute,

Two days after Donald Trump became the first American since Grover Cleveland to win nonconsecutive presidential elections, the Federal Reserve announced a quarter percent cut in interest rates.

Following this announcement, Fed Chairman Jerome Powell held a press conference where he said that he would not comply with any presidential request that he step down before his term ends in May of 2026.

Powell claimed that the president lacks the legal authority to fire the Fed chairman.

So, if President Trump tells Chairman Powell “you’re fired,” Powell could bring suit asking a court to review Trump’s action.

President Trump and Chairman Powell are at odds over President Trump’s desire to require the Federal Reserve to consult with the president before changing interest rates or taking other significant actions.

Powell is likely to do all he can to convince Congress to reject any legislation giving the president any type of official role in setting monetary policy.

After all, Chairman Powell is so protective of Fed autonomy that he opposes auditing the Fed on the grounds that it could threaten the Fed’s independence, even though there is nothing in the Audit the Fed legislation giving the president or Congress any new authority over the Fed’s conduct of monetary policy.

Requiring the Fed to consult with the president regarding monetary policy would likely increase price inflation and dollar devaluation. Politicians usually like low interest rates because they associate low rates with economic growth. Politicians also want the Fed to keep rates low so the federal government can keep racking up huge amounts of debt. Without a central bank that is ready, willing, and able to monetize the federal debt, the welfare-warfare state would not exist.

Despite the claims of Chairman Powell and other central bank apologists, the Fed has never been free of political pressure. Presidents were trying to influence the Federal Reserve long before Donald Trump began posting “mean tweets” about Jerome Powell. Requiring the Fed to consult with the president would at least make the president’s efforts to influence monetary policy open and transparent.

President Trump and other Fed critics such as Massachusetts Senator Elizabeth Warren think they are more capable of determining the “correct” interest rate than the Fed. This ignores the fact that interest rates are the price of money and like all prices are shaped by a variety of constantly changing factors. When the Fed manipulates interest rates, it distorts the signals sent to investors. The result is the boom- bust business cycle. The fiat system is also responsible for rising income inequality and the decline of the dollar’s purchasing power, which has lowered most Americans’ standard of living.

President Trump should work to eliminate the need for the Fed to keep interest rates low. He can do this by fighting for massive spending cuts, starting with the military-industrial complex.

He should also push Congress to pass the Audit the Fed bill.

Additionally, President Trump should support legalizing all competing currencies.

The forthcoming tax bill should include a provision exempting precious metals and cryptocurrencies from capital gains taxes.

The key to making America great again is to make money free again.

ESG is already dead, as we have been noting over the last couple of years. But with Trump taking office, it’ll officially take custody of its death certificate.

Such was the topic of a new Bloomberg op-ed piece this week by John Authers, claiming that Trump is going to “bury” ESG once and for all. In the U.S., Environmental, Social, and Governance investing has taken a sharp downturn, falling victim to political polarization and failing to deliver on its promises.

Initially aimed at promoting sustainable and ethical business practices, ESG became embroiled in culture wars and now faces a retreat as American priorities shift toward a more nationalist, even mercantilist, approach to economics, the piece reminds us. 

Conservative leaders have demonized the term “ESG” to the point where prominent figures like BlackRock CEO Larry Fink have abandoned it, calling it “weaponized.” BlackRock, once a major advocate for ESG, has become a target for conservatives who associate the company with identity politics.

Heritage Foundation President Kevin Roberts even listed BlackRock among “decadent” institutions in his new book, sharing this label with organizations as disparate as the Boy Scouts of America and the Chinese Communist Party.

Authers notes that many investors have already grown skeptical, seeing ESG as a marketing gimmick, with big players like Invesco facing fines for “greenwashing.” Europe, in contrast, has tightened ESG standards, requiring fund managers to meet specific environmental thresholds for the ESG label, which complicates U.S. investments for European funds due to regulatory differences.

In the U.S., however, the SEC has scaled back ESG requirements, with its task force on the matter disbanded in September. This deregulation could accelerate if Trump returns to office, likely leading to further cuts to ESG-related mandates, Authers writes. 

A market shift away from ESG is already evident, as BlackRock’s clean energy ETF has declined significantly since its 2021 peak, with funds moving back toward traditional energy sectors.

Investor interest in ESG has waned considerably, as shown by declining search activity in the U.S. and a drop in ESG mentions during corporate earnings calls. Media coverage of ESG, which surged in 2016, has also fallen, reflecting dwindling public interest. Executives, once eager to discuss ESG initiatives, now mention it far less, a shift apparent in recent earnings call transcripts.

BlackRock’s own support for environmental and social proposals has sharply declined. While the company maintains a commitment to corporate governance, it backed only 4% of ESG proposals last year. With the shift away from ESG in corporate America, any hope of reshaping capitalism through ethical investing appears to be in retreat, leaving questions about what economic direction will replace it.

Recall just days ago we wrote that ESG fund managers are being told to ‘keep their lawyers very close’. Aniket Shah wrote in a note last week: “We’d encourage all ESG fund managers to have a lawyer on the team, or on speed-dial.”

He continued: “Antitrust risk remains high for asset managers in ESG; there haven’t been any cases yet, thus there is no legal precedent. Further, legal risks regarding fiduciary duty will stay relevant as states enforce anti-ESG laws.”

Yahoo reports that Trump’s victory has already hit green sector stocks, with wind-energy companies among the hardest hit.

Authored by Simon Watkins via OilPrice.com,

• Trump plans to prioritize increasing U.S. oil and gas production by removing federal drilling restrictions, which could lead to lower energy prices.

• Trump may look to negotiate an end to the Russia-Ukraine war with a settlement that secures disputed regions for Russia.

• Trump is likely to support Israel in taking action against Iran’s nuclear program, aiming to strengthen U.S.-Middle East alliances and counter China’s influence in the region.

Crucially for President-Elect Donald Trump’s second term in office, he will have considerable personal influence over the Senate (in which his Republican Party now holds a majority), and over the Supreme Court (where conservatives hold a six-to-three majority). His Party – and few can argue that it is now truly that – has also now secured a majority in the second of the two institutions of Congress, the House of Representatives, giving the re-elected President will have a once-in-a-lifetime chance to push through whatever legislation he wants, especially in the traditional honeymoon period of the first 100 days in office.

Three areas that he is likely to address in this period will have enormous ramifications for the global energy sector and the key countries that constitute its core.

One of these areas will be moves to increase the U.S.’s oil and gas production, as stated in several of Trump’s campaign speeches and documented in his ‘Trump Agenda47’.

Broadly, he will, “…set a national goal of ensuring that America has the No. 1 lowest cost of energy of any industrial country anywhere on Earth”. He added that to “keep pace with the world economy that depends on fossil fuels for more than 80 percent of its energy, President Trump will DRILL, BABY, DRILL”. He also highlights that he will, “end Biden’s delays in federal drilling permits and leases that are needed to unleash American oil and natural gas production”. This is likely to include the removal of much of the previous Presidential Administration’s pausing of key liquefied natural gas export permits. The likely net effect of this on oil and gas prices will clearly be bearish.

Another move Trump is likely to make in the first 100 days will be pushing for a negotiated settlement in the Russia-Ukraine War.

During his campaigning, the President-Elect repeatedly stated that he could end the war “in 24 hours” based on two key dealmaking tactics delineated in an interview with Fox News in July 2023. First, he would tell Russian President Vladimir Putin that if he did not make a deal with Ukraine then the U.S. would dramatically increase the scale and scope of its aid to the war-torn country. As a senior global security source who worked closely with Trump’s first Presidential Administration exclusively told OilPrice.com last week, this would include long-range sophisticated missiles being given to Kyiv and the permission to use them deep inside Russian territory that was ‘active’ in its war against Ukraine. Second, he would tell Ukrainian President Volodymyr Zelenskiy that the U.S. would withhold all aid to it unless Kyiv negotiated a deal with Moscow. The starting point for the deal itself that Trump has in mind, according to the source, is one in which Russia retains the original disputed territories of Luhansk and Donetsk, in addition to keeping Crimea which was annexed during the 2014 invasion. The other major territories in the southeast – Kherson and Zaporizhzhia – plus other areas in the northeast occupied by Russian forces, would form part of a demilitarised zone between the two nations.

Trump can see an additional benefit in this plan, which is based on the premise of countries ultimately being responsible for ensuring their own security. This is that the European countries of the North Atlantic Treaty Organisation (NATO) will infer from it that they must finally assume more of the spending burden of the security alliance with the U.S. to ensure the defence of their own borders. Trump has long made it clear that he thinks European countries should spend at least 2.5% of their annual gross domestic product (GDP) on defence, with the U.S. having spent 3.6% of GDP in this way last year. Over the same period, only Greece managed this minimum 2.5% requirement (at 3.23%) with Great Britain second (at 2.33%). The longstanding de facto economic leader of the European Union of 27 countries was near the bottom of the list, at just 1.52%.

That said, the combination of a negotiated settlement ending the Russia-Ukraine War and the implicit obligation to spend at least 2.5% of GDP on defence every year might prompt a gradual fracturing in the already uneasy political cohesion of the European Union towards punishing Russia for its aggression against Ukraine. Many European economies have buckled in recent years from the effects of Covid, surging inflation caused by soaring energy prices after Russia’s invasion of Ukraine and competition from China in key sectors. These elements may convince any new German government (following the recent collapse of its governing coalition) that resuming the cheap and plentiful supplies of energy from Russia upon which it built much of its economic wealth over the previous two decades is a necessary step to its financial recovery. Russia, for its part, will be more than happy to accommodate it, beginning with the extension of gas exports to Europe via Ukraine at the end of this year.

The third measure that Trump is likely to take in his first 100 days as President will be giving the nod to Israel to do whatever it wants with Iran.

It should be remembered that it was Trump’s belief that Iran was using the ‘Joint Comprehensive Plan of Action’ (JCPOA, or colloquially ‘the nuclear deal’) cynically to quietly build up its nuclear weapons programme from money accrued through increased trade and investment made possible by the deal, as analysed in full in my latest book on the new global oil market order. That was why the U.S. unilaterally pulled out of the deal in May 2018. It was also Trump who said on 4 October that “Israel should hit the [Iranian] nuclear [facilities] first and worry about the rest later.” He added – in response to Biden’s flat ‘no’ on Israel striking Iran’s nuclear sites — “That’s the craziest thing I’ve ever heard. That’s the biggest risk we have. The biggest risk we have is nuclear … Soon they’re going to have nuclear weapons. And then you’re going to have problems.” Removing – or at least severely downgrading – Iran’s nuclear threat would allow the Trump Presidential Administration to reassert its authority with several major Arab states, most notably Iran’s historical nemesis in the region, Saudi Arabia. This could be done through the re-start of the relationship normalisation deals that the previous Trump government orchestrated between Arab states and Washington’s principal Middle Eastern ally Israel that began in 2020 with the UAE, as also detailed in my latest book. The resuscitation of these types of deals is something Trump has already signaled as being a key priority for his new Administration. Doing this, in the aftermath of a major Israeli strike on Iran’s nuclear weapons development programme, would have the corollary benefit for Trump of derailing China’s efforts since 2018 especially to replace the U.S. as the leading superpower in the vital global oil and gas region of the Middle East. It would also enable the U.S. to resume the sort of cooperation with Saudi Arabia and OPEC that kept oil price within the ‘Trump Oil Price Range’ for virtually the entirety of his previous presidential term.

In a significant new wrinkle in retirement savings rules, some older workers will be able to put several thousand more dollars into 401(k) and similar retirement plans in 2025. The feature was included in the 2022 SECURE 2.0 Act, which stipulated that it would take effect in 2025. 

First, note that the general contribution limit for 401(k), 403(b), 457, and the federal employees’ Thrift Savings Plan in 2025 will be $23,500. Those who are between ages 50 and 59 — or age 64 and older — will be able to contribute $31,000. Those limits are up $500 from this year.

The new twist affects those who will be between 60 and 63 years old in 2025 and subsequent years. They’re now granted the power to make “super catch-up contributions.” Specifically, that means they can pour $34,750 into their workplace retirement plans in 2025 — $4,250 more than their total for 2024. You qualify for this break by turning one of those qualifying ages anytime during the year. For example, someone who turns 60 in November can make the full super catch-up contribution for that year. 

Federal law doesn’t require employers to allow catch-up contributions, but adoption of the feature is nearly universal. Meanwhile, a recent CNBC survey found that 40% of American workers are lagging in their saving and planning for retirement, and that 21% of retirees have no savings at all. Similarly, a Bankrate survey found 35% of Boomers consider their savings “significantly behind” where they should be. 

The super catch-up feature was included in the 2022 SECURE 2.0 Act, which stipulated that it would take effect in 2025. Another catch-up contribution twist is slated to take effect in 2026: For those who make more than $145,000 in 2025, all 2026 catch-up contributions must be made to Roth accounts. The same test based on prior-year earnings will continue to apply in subsequent years. 

Traditional 401(k) contributions aren’t taxed in the year they’re made, but instead are taxed upon withdrawal. Roth accounts flip the tax benefits: When money is put into a Roth, it’s subject to federal income taxes, but qualified withdrawals in retirement are tax-free.   

A Vanguard report on the behavior of nearly 5 million participants in its retirement plans suggests that the new break will only be used by a small percentage of those eligible to use it. Vanguard reports that, as of 2023:  

• 14% of participants max out their contributions
• 15% of those eligible for catch-up contributions take advantage of the opportunity

Traditional and Roth IRA limits for 2025 aren’t changing: As with this year, qualified individuals can contribute $7,000, with an additional $1,000 allowed for those who will be 50 or older at any point in the year.  

Authored by Charles Hugh Smith via OfTwoMinds blog,

Machiavellian has negative connotations–cynically unscrupulous scheming to gain or maintain power–but this misses the mark of Machiavelli the man who sought a livelihood in the cutthroat political street fighting of Italy’s city-states circa the late 1400s and early 1500s.

As he made clear in other writings, Machiavelli favored democracy over competing political arrangements, and he wrote The Prince (the entire book in PDF format) as a sort of extended resume seeking to bolster his chances for employment.

First and foremost, Machiavelli explores the psychology of power and leadership. For leaders who seek to change the polity rather than merely maintain the status quo, Mr. M. lays out the challenge facing transformational leaders in Chapter Six of The Prince:

Here we have to bear in mind that nothing is harder to organize, more likely to fail, or more dangerous to see through, than the introduction of a new system of government.

The person bringing in the changes will make enemies of everyone who was doing well under the old system, while the people who stand to gain from the new arrangements will not offer wholehearted support, partly because they are afraid of their opponents, who still have the laws on their side, and partly because people are naturally skeptical: no one really believes in change until they’ve had solid experience of it.

So as soon as the opponents of the new system see a chance, they’ll go on the offensive with the determination of an embattled faction, while its supporters will offer only half-hearted resistance, something that will put the new ruler’s position at risk too.

In other words, those who are diminished by the proposed reforms will resist with all their might, while those who might benefit are lukewarm in their support because the benefits of the reform are not yet in hand. Put another way, one person’s efficiency reform is the loss of a livelihood / gravy train to another, and the gains of the proposed efficiency are 1) in the future, while the livelihood is threatened in the present, and 2) the gains of the efficiency are disbursed over the entire populace, so that the recipients of the reform have little incentive to fight tooth and nail like those defending their slice of the status quo pie.

This presents the transformational leader with a difficult choice of strategy: the first option–to attempt a wholesale transformation of the status quo in a Big Bang reformation of every agency and institution’s budget, leadership and culture–is tempting, as the political capital of the new leadership is strongest at the start, before its opponents have had time to chip away at the new administration’s support.

The second option is to choose one or two critical reforms and devote every ounce of political capital to pushing these through. This option is less grandiose, more cautious, but it’s also the one most likely to succeed, as the risk in Option 1 (The Big Bang blitzkrieg) is that the political capital of the reformers will be diluted by engaging the armies of opposition that will arise in every threatened agency and institution.

The benefit to this strategy is one or two big wins at the start solidifies the political support of the reformers. Supporters will see significant victories as proof the reformers are sincere and their power is sufficient to push through reforms despite the resistance of incumbents / special interests.

On the other hand, the incremental approach of winning a few key battles at the start might miss the opportunity to bulldoze all opposition before they can organize resistance. Much depends on the general zeitgeist of the time. If those benefiting from the status quo believe the system is sustainable as is, they will fight tooth and nail to water down reforms to protect their gravy train.

If the status quo is crumbling, then insiders are incentivized to make a deal with the reformers as a better option than losing everything as the system unravels beneath their feet. It also matters if the general public and movers and shakers are solidly behind the reformers, or if their popular support is an inch deep and a mile wide.

Machiavelli’s advice to transformational leaders is: don’t underestimate the fierce resistance of those losing their grip on power and all the financial rewards of that power. Be prepared to use every trick in the book to dilute and fragment opposition: buy off those who can be bought off, offer face-saving deals to key players, compromise to get key changes, set opposing factions against each other, and be generous and humble in victory rather than triumphant.

Looming over the entire reformist enterprise are the costs and risks posed by debt. Living on borrowed money is splendid in the beginning, when the cost of servicing the debt is low. But as the debt mountain grows, the cost of servicing the debt incentivizes borrowing more to pay the interest, accelerating the expansion of debt in a self-reinforcing feedback.

The cost of servicing the debt soon squeezes out other expenditures, and the borrowers’ incomes no longer support investing and spending on the scale to which they’re accustomed. The solution is of course to borrow more, and pass through the portal to the Magical Kingdom of Magical Thinking where we believe that we can “borrow our way out of debt” because borrowing more will enable us to “grow our way out of debt.”

Once the mountain of debt is towering, this notion is fantasy. The only sustainable options are painful: 1) devalue the currency, wiping out both the debt and the currency’s value, 2) tighten our belts and pay down the debt by reducing consumption, or 3) default on the debt and absorb the enormous losses, as every debt is somebody else’s asset.

That choice already looms large, and reformers must reckon with that as well as their reformist agenda. Here is total debt:

Here is federal debt:

And no, we’re not going to be “saved” by interest rates going back to zero: higher for longer is the future, as bond yield / interest rates cycles are multi-decade affairs.

Zero interest rate policy (ZIRP) was delightful in the moment but the full consequences of that stupendous error have yet to play out.

Things have looked bleak for Ukraine’s chances on the battlefield, but The Economist has forewarned that a political struggle awaits Ukraine domestically. President Volodymyr Zelensky’s grip on power could be slipping, and he’ll likely face a serious power struggle in 2025.

“If elections were held tomorrow, Mr Zelensky would struggle to repeat the success of the landslide win he secured in 2019…. Internal polling seen by The Economist suggests he would fare badly in a run-off against Valery Zaluzhny, the other wartime hero,” The Economist in a bleak assessment which is far more negative concerning his future leadership than the D.C.-insider publication has ever been.

The report details that amid daily, grim funeral processions in various neighborhoods of the capital, anxiety builds concerning the future Trump administration and what his promises to end the war will bring.

“Will his new administration tilt Ukraine’s way or Russia’s? Can he impose a ceasefire? Will elections follow?” – The Economist questions, describing the mood on the streets. 

“For now, there are two dates on Kyiv politicos’ lips: January 20th 2025, the date of Mr Trump’s inauguration, the first moment for any possible ceasefire and lifting of military law, and May 25th, the earliest mooted date for an election.”

Zelensky has previously faced fierce criticism for canceling last spring’s scheduled election, in the name of martial law and defense of the nation amid the Russian invasion. Some US Republicans in Congress had at the time warned that this could be reason to withhold arms and further funding, seeing in it a serious anti-democratic tendency.

As for this spring, Zelensky is likely to keep extending his term, while keeping the elections ban in place:

The presidential office denies it is preparing for a vote. Most sources remain sceptical that it will happen. It is not the first time the capital has been awash with rumour. There are issues of organization and legitimacy: how can a splintered nation at war hold elections? The country also has yet to endure what many assume will be a difficult winter. “Engaging in electioneering right now would be suicidal,” says Yaroslav Zhelezhnyak, an opposition MP.

But this means he may be forced to enter a US-backed deal with Moscow, which could mean political destabilization from the ‘enemies within’ – such as far right Azov and Right Sector hardliners – who will do anything to thwart and sabotage peace with Russia, given it would mean territorial concessions.

Either Zelensky gets stuck in a bad deal for Ukraine, or he faces military collapse in the east. But a former adviser of his explains, “Zelensky has only one way out to get out with an intact reputation. That is to run elections [without him] and go down in history as the man who united the nation in war.”

The Economist’s correspondent has observed there does seem to be some movement on the ground:

Still, some groundwork appears to have begun. Regional election headquarters are mobilizing, and work on candidate lists is beginning. The representatives of one likely presidential rival to Volodymyr Zelensky say that Ukraine needs elections; but they worry about making a public statement to this effect, fearing a fierce backlash from the presidential office.

Indeed, Zelensky may be plotting his own graceful political exit amid the many unknowns of the Trump administration. His star power has also long ago faded, as was on display during his last visit to Washington.

It remains, however, that Zelensky has already long banned opposition parties and media, and sought to suppress the Russian language, angering a huge segment of the population…

The Economist: Volodymyr Zelensky faces a power struggle in 2025.

After banning ALL political opposition in Ukraine and consolidating media channels under the regime’s umbrella, Zelensky does not face a power struggle. A “power struggle” is possible in a democratic state.… pic.twitter.com/uvgD8dXe6D

— Lena Petrova (@LenaPetrovaOnX) November 12, 2024

Ukrainian officials are further growing increasingly nervous over who is in the administration and who is out. They are “disturbed” by Trump’s decision not to offer a national security post to Mike Pompeo. Instead, “The worry now is that Mr. Trump’s offer to Ukraine will come to resemble something closer to ideas put forward by J.D. Vance, the incoming vice president.”