Bearish conviction rising again. Can the Fed cut as early as July?
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Welcome to the Saxo Market Call. Before we get started, it's important we emphasize that the views and opinions expressed in this podcast are those of the host and guests and do not constitute investment advice or recommendations. All information provided is for educational and entertainment purposes only. Hey, everyone. It is Thursday, 12th of June, 2025.

And I'm going to make an attempt here. I've gone back and forth with trying to get bearish a couple times the last couple of weeks.

We've had somebody who was saying this is one of the most epic collapses in the VIX. Of course, it came from a ridiculous level into those post-liberation day tariff announcements, but one of the biggest collapses in the VIX in history, if not the largest by certain measures. And, you know, really tough to get bearish when you've seen that type of collapse. And the confidence for bears has to have been shaken by some of this price action and a couple of recent sell-offs that didn't really go anywhere. But...

I'll stick my neck out once again this time and say that I'm getting a little bit bearish here on risk sentiment on the U.S. equity market. So let's run through some reasons why. So the latest is that Trump was out late yesterday saying he's just going to set the tariffs unilaterally in a week or two. It's always that one week or two or the two-week timeframe that Trump seems to like.

Although the good cop, bad cop routine, we had good cop Besant out saying, look, if we have significant trade partners that are negotiating in good faith, it's highly likely that 90-day extension will be extended further. But nonetheless, I think the market getting spooked on this tariff issue once again is

Finally, maybe a sign that yes, while many times recently the market seemed inured to and immune to reacting to tariff headlines, I think this one was a sign that maybe that is a little bit too much complacency. And maybe some reminders as well that the –

In the budget deficit numbers we got yesterday that the U.S. in May saw something like $23 billion in tariff revenue. And this is despite all that massive front running we saw ahead of the tariffs to get various things done before they went into effect. So that number will go up, and I would suspect it ends up more in the $40 to $50 billion per month range. Still not going to offset the deficit, but still a meaningful impact on inflation.

on growth at the margin. And we still don't know where the fiscal drag will be if this big, beautiful bill continues to be a big question mark, expansion of the debt ceiling, all these issues.

So there's that. There's also, I think, concerns about the direction of the U.S. economy. We need to wait to get more data points. It could be today we get another weak jobless claims print. Again, we need to see really a string of these. Two is not quite a string. Three begins to be a string, and four, five, six becomes a more clear trend if we're getting especially, I think, above 250K consistently on the weekly claims. Okay.

But yeah, let's – so those are some reasons I think to get – to be concerned here. So we did have Trump out yesterday saying, look, the deal is done. By the way, this is not signed yet. Trump may sign it, but we need to see the Chinese side signing the deal, signing off on this supposed deal that was breached between the two sides, crystallizing apparently what was agreed in the Geneva round of talks yesterday.

where Trump mentions in his Truth Social post that China will have access to universities and that they assess 10% tariffs on us and we assess, he says, 55% tariffs on them. Some clarification of that number needed because

That 55% is not what the tariffs are. They're at 30%. There are some areas where there are carve-outs, where there's no tariffs or very low tariffs. I can't remember exactly on smartphones, laptops, et cetera. And then there are areas where there are very high tariffs, 100% on EVs, 25% on some EV components. So you can get 55 if you add the 30 plus the 25 on the tariffs. But the general tariff number for U.S. on China is 30%.

It's also important to point out that there is a – that the Chinese side has, according to Wall Street Journal, I think it was an exclusive they had, that they are only going to allow a six-month license at a time for these rare earth exports, which are so critical in so many processes. And let's remember, you know, we talk about the rare earth elements themselves and what percentage China has control of those elements.

which varies by this specific rare earth element. But really the bottom line here is that it's not just the processing and so on. We talked about that endlessly. It's that they also get packaged or incorporated into key little industrial components, especially magnets, which are a focus and are used just all over the place in EVs, in chips, in wind turbines, etc.,

And China has something like a 90% share of these industrial components. So not only would you have to spend multiple years building out the mining and processing supply chains for the elements themselves, but it's all the industrial, the factories that are actually assembling this into and incorporating this into industrial components. That takes another bit of time here. So this is a pretty solid bit of leverage that China has over the situation today.

And putting that six month limit, I guess it gives them some, some weaponization to prevent against some new, uh, you know, unilateral threats from the U S side on, on tariffs. Uh, the, the leverage apparently that, uh, the U S side is working with, uh, is, you know, besides consumer demand itself is apparently the on jet engines, uh, and jet engine components, probably for China's mini Boeing airplanes and ethane, which is a key chemical input for plastics consumption. So, uh,

Again, we need to see the deal signed. This is the setup. It looks like a sort of a nervous ceasefire to me more than that we should expect some further improvement. All right, what are the news did we get yesterday? Of course, there was that very soft CPI number that set the Forex market on edge with the dollar selling off. Not completely broadly. I'll get to that a little bit later. But we, of course, did see yields coming down lower, and that was a key factor.

input for foreign exchange as well. Risk sentiment was actually doing quite well until the Trump threat later in the day on trade. But the key thing being that this keeps the U.S. treasury market from becoming a problem immediately at least as yields fell pretty solidly across the board. Still a little bit surprised the degree to which the market is not pricing the risk of a July rate cut from the Fed. So we have

Not much change in there despite the two-year coming off, the two-year yield in the U.S. coming off several basis points yesterday. I think seven or eight basis points was the final tally into this morning.

But you're not seeing much anticipation of that Fed rate-cutting move into bringing that forward. It's more just maybe a little more rate-cutting further out. So we are at about 50 basis points reduction through the December meeting. But you can build the case that if we get a string of these weak jobless claims reports and other confirming data, and especially if we get an ugly June jobs data report, the payrolls change going negative or something like that in the early July release of that June data report,

that the Fed could be pulling the trigger as soon as July. We only have about an 18% odds of a July rate reduction incorporated into the forward price. Even September is not fully priced for a 125 basis point rate cut. So, you know, this could lead the, and then next week is the June FOMC meeting.

Could the Fed be looking at just leaving the door open to the potential to move without wanting to tip its hat, indicating something about really heavy focus on the labor market and data dependency? Normally the Fed, not a huge market mover, but I think in this case, especially in the case of the U.S. dollar and, of course, U.S. treasuries, et cetera, that this could be a very interesting setup going into next week.

So something I'm watching for. And I have some pretty good company on this account. By the way, have a listen to it. There's a podcast series I wasn't aware of called – there is a podcast series I wasn't aware of called Bloomberg Talks. You can look that up in your podcast application alongside, of course, the Saxo Market Call. And some great names that were interviewed yesterday, including the great Paul Tudor Jones, one-of-a-kind guy. And he is –

was out speaking. I haven't even had a chance to listen to the whole thing yet today. But he said in an intro bit where he was talking about sort of a trade competition that was run that Stanley Druckenmiller placed third in. I can't remember the other two that did really well. But he was asking, you know, what is the single trade you would make looking forward from here?

And his answer was, look, it's the yield curve. The Fed is going to get a new, very dovish chairman. So, of course, the question here is the timeframe because Fed Chair Powell's term does run until May of next year. But I think the general notion that the U.S. policy rate is far too high relative to the current inflationary trajectory and especially, more importantly, and his belief is it is about inflation.

the debt load and that the policy rate is too high, not just for the economy, but relative to supporting and financing that US Treasury debt. So he sees a yield curve as a focus. Front end coming down is the chief part of that focus on the yield curve. And I share that. And of course, the question will be one of timing and whether we can get those rate cuts before a new Fed chair is appointed.

Okay, and as indicated, the combination of that CPI data, and especially it was really the Trump talk on tariffs later that was the kicker for the U.S. dollar. Some pretty interesting price action after the CPI release yesterday. We saw Eurodollar running up higher, as you would expect, as U.S. yields came down, hitting close to that sub-115 resistance that was there in Eurodollar yesterday.

And then just stumbling, and stumbling quite badly. And dollar-yen sold off sharply and went all the way back above 145 after the data point. So really dodgy price action, really frustrating for the dollar bears, sort of underlining that sort of inability to get some conviction going into this market. But then later with the Trump mention on –

unilateral moves on assessing tariffs, et cetera, we saw the follow through and we saw Euro dollar 115 trading and above and we saw Dalian coming back down and actually Dalian taking over the leadership overnight.

Pretty interesting. Unfortunately, in the case of dollar yen, we're still bottled up in that range. We need to see it really pounding lower and sticking lower and threatening that sub-142.50 support levels and range levels here. We've had some really bad direction changes in dollar yen.

Similarly in EURUSD, a little bit less so. And of course, 115 needs to stick here in the EURUSD move. And then as indicated earlier, the dollar move is not really super broad here. So even had Aussie dollar under pressure after yet another attempt at the highs was rejected yesterday. So it really is a little bit within the G3. We're seeing this dollar weakness here.

Not so much in the broader picture. And in fact, sterling is an interesting negative focus as well. So just some really interesting data coming out today. Manufacturing production for April was weak. This services index was weak. And add that to that weak payrolls number, which was the big thing that sort of kicked off this recent bout of sterling weakness. And we have Eurosterling trading above 85 this morning for the first time in quite a while.

But I would just note, just along the lines of if we are tilting into that weak risk sentiment that I'm expecting now, I think Sterling is a little bit exposed there. And it's a little bit exposed on the sort of negative side.

international investment position theme as well, of course, requiring that its twin deficits are financed by the rest of the world, just as the US is. And on that note, we saw in April, a visible trade balance number out of the UK was minus 23.2 billion pounds. That is an absolutely titanic trade deficit for a economy of that size. It was the second worst trade

trade balance ever in nominal pound terms. So I think adding to the risk for negative starting momentum, and of course if the economy is rolling over there as well, that focus on those UK rates as a support for the currency could crumble as well if the Bank of England is looking at cutting more than was previously expected, which I would expect to be the case. All right, moving swiftly along, let's see.

We had a very interesting earnings report after the close. Oracle out with some really spectacular results, seeing dramatically higher sales and guiding very strongly. There is this so-called RPO number that is a big focus when talking about Oracle. RPO standing for Remaining Performance Obligations.

Basically, when you do a service contract with Oracle, they will book some of the revenue now, I guess for the current quarter. But if you're committing to multiple years, then that revenue won't be booked until further down the road. So obviously, RPO means that's that future revenue that is probably signed but not yet delivered. So yeah.

One of the analysts saying we see some tremendous, what do they call it, RPO acceleration ahead. And just a couple of numbers on some of their AI data center stuff were spectacular. There was 115% growth from Q3 to Q4. And I think it was the multi-cloud data center bookings for a couple of the really big MAG7 names.

And just on the data points, 23 multi-cloud data centers. Now they expect to build 47 more in 2026. So this is proving to be quite an AI momentum play at the moment. Of course, that could go bite both ways if the AI momentum peters out. But just another data point or another result here pointing to how much AI is still the focus. Not necessarily seeing that elsewhere. This was not some big, broad boost to the AI space.

NVIDIA did hit a local high there yesterday but closed on a low note and was actually down a bit after hours. We're seeing some weak risk sentiment post yesterday's U.S. close. So an interesting data point, but it's a specific story. Elsewhere, looking at a couple of the Mag7 that are particularly ugly, Apple just looks horrible on a chart.

From a technical analysis point of view, and Amazon looking, it's posting an evening star, a nice three candlestick combination that looks a little bit bearish. As well, another thing making me a little bit bearish on the U.S. equity market is the Dow Jones Transports had a very ugly session yesterday.

All right, that just about wraps it up for today. I'll try to be back tomorrow with the full podcast treatment with a guest in here in the studio so it's not just myself speaking. Slide deck, I know I've already put in some great links for tomorrow's slide deck. Some very interesting listens I think you'll find and reads for the weekend.

So let's watch and see what happens today. Again, this dollar move needs to stick. Risk sentiment is looking a little bit dodgy here in the short term. Let's see if it gathers a bit of momentum to the downside. Europe is quite weak this morning. And I think the key data point today will be that U.S. jobless claims number. And, you know, three starts to look more like a string than two. If we get another weak jobless claims released today. We'll see. And we'll be back tomorrow with the next Saxo Market Call.