This Shouldn’t Be Possible

Loss of economic momentum is not just happening in the U.S., it is globally synchronized with basically the same pattern showing up all over the world. We got more updates from the U.S. that suggest the same thing, plus from neighbors Canada and Mexico, with especially Mexico putting up its deepest contraction since April this year. Over in Europe, Germany fell back into the negatives again, dragging down Italy, plus an unexpected sharp decline in Switzerland. Global bellwether Switzerland. So in addition to the domestic data indicating U.S. demand was seriously waning to finish out 2025, it goes along with the ongoing monetary tightening, especially in euro-dollar conditions where trade is a key component, and we keep getting more confirmation of that tightening. There's a reason why, for example, treasury market inflation expectations have been stalling over the past several months. Even as certain Fed policymakers ramp up their inflation rhetoric, the goods economy in particular, where there has been some price pressure, is feeling the slack and therefore so are these critical break-even rates in the TIPS market. As much as you're told economies are individual islands, the truth is there are far more globally synchronized factors in them, made so not just by the importance of trade flows and just importantly these euro-dollar monetary mechanics. You get tightening in the monetary system, it adds friction and slows down trade, which impacts local economies, especially in these bellwether states. So pay attention to Canada and Mexico if you want to know what's happening at the margins for U.S. demand. Look to Germany and Switzerland for clues about wider Europe and beyond. The monetary system is struggling with credit market cracks and cockroaches, the credit market cycle, at the same time is picking up on this waning macroeconomic momentum that is showing up the same pattern that is materializing all over the place that last year ended on a down note and a substantial down note. So a great place to start is with treasuries and TIPS. Sticking with our global theme, the treasury market trades on factors far beyond just the U.S. border. It's one reason why no matter how bad the U.S. government's borrowing has gotten to be, there are buyers for U.S. debt because treasury yields are not just growth and inflation expectations from within the United States economy or really within the United States portion of the global economy. Treasuries are responding to conditions and expectations for future trends all over the world and not divergent trends either. The market ends up pricing what the dominant theme will be in the near and longer term future put into the language of fundamental interest rates. So bull steepening on the yield curve is a combination of U.S. potential within the broader context of these globally synchronized or synchronizing developments. Similarly, TIPS inflation break-evens aren't trading just the U.S. CPI over the next several years so much as all the international combinations that will eventually impact the U.S. CPI. Trade in goods is a huge component of that obviously given how much the U.S. imports. So perceptions about U.S. demand from the standpoint of foreign producers and their local constraints are important considerations. And rather than rising as maybe Casey Jeff at the Fed would have you believe, TIPS break-even rates as I've been pointing out continue to weaken. Yes weaken. They were never high to begin with and the treasury market itself never bought the tariff inflation narrative. Break-even rates have been remarkably steady throughout save for the one short-run increase back in January and February last year. But even then it was only the shorter duration TIPS and it never really got all that far at any point. Zero tariff inflation risk. But that already points to suppressed demand. We know that tariffs have driven up costs for producers so what TIPS are then saying is that global businesses won't have the pricing power to be able to pass them along to customers either then or now and either in their own areas or to U.S. customers. In terms of production then with that weak demand expectation any increase in output last year could only have been due to tariff distortions. Those that we've been following the widespread activity of front loading as much as possible before trade duties were applied on finished goods on components even raw materials just look at copper. Before we go on with our video today let me ask you a question. 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We thank Monetary Metals for their sponsorship but now let's get back to the rest of our video. That wasn't just in the early months of the year either. I went over this in a video this past weekend showing that there was a second tariff distortion during the summer. One that could be found in U.S. retail sales as well as these various PMIs as you'll see. Not to mention real economy hard data and stuff like you know as I went over diesel usage. So with tips breakeven rates hovering around their lowest values in over a year what that indicates is a further loss of momentum in goods pricing. Goods pricing even after a weak year for it despite rising output costs. In other words the treasury market is already primed for this loss of global momentum that we're now getting initially in PMIs and sentiment changes all around the global system. So given all that in the marketplace it's also worth taking a look at and noting the monetary tightening that we're getting indications for all across the euro dollar world. Talked about repo, the fed's repo facility, SOFR rates and all that and I'll update those as we get past the year end so we can see more clearly outside the seasonal bottlenecks. But there's other indications. We talk about repo fails that skyrocketed and repo fails aren't the only one or nor repo the only indication of serious euro dollar tightening. Back on Friday's video I showed how this was surprise surprise a global matter too. European banks have conducted a shadow bailout of shadow banks, a massive one at that. It's not just US-based cockroaches, it's the implications for every financial firm whether regulated bank or shadow bank that have failed to do basic due diligence and allowed a lot more and a lot worse garbage lending to take place for years. There's going to be fallout from that, there's going to be consequences. So put that together with weaker economic fundamentals broadly speaking heading into 2026, including this loss of momentum in the goods economy, you end up with even tighter monetary conditions in the euro dollar world. So one data point that we watch closely to give us some insight into this black hole is the amount of treasury reserve assets that are owned by foreign governments but held in custody of the Federal Reserve Bank of New York. Now it suggested a major monetary problem in the euro dollar world, a big-time monetary problem, before finally seeing corroborated by something like repo fails a little bit later on. The huge loss of treasury assets which began in early August with the release of the July payroll reports, that's not coincidence, and as that trend grew bigger then we started to get more confirmation in other areas for things like the repo market etc. So as of the latest figures for the final week of 2025, another new low, that means that foreign governments continue to have to use their reserve assets to up for euro dollar funding issues locally. That's why reserve assets disappear from New York. It's not that governments are selling America and ditching the dollar, they're forced into sales by euro dollar monetary difficulties, a mechanical relationship that goes back to the very beginning of the euro dollar system. The Japanese for example, they were selling t-bills in the early 1960s when faced with euro dollar tightening. That much hasn't changed and it won't change as long as the world is stuck with the euro dollar as the reserve currency. And the reason why that tightening would show up is financial risk aversion, the credit market cycle cracks and cockroaches, but also a global economy that is suffering from lost momentum emerging from tariff distortions in 2025. Rising dangers in both spheres, especially as we know that they're both related. The weaker the economy gets to be, the flatter beverage, meaning more likely job losses, and not just in the U.S., the greater pressure that will put on garbage lending and cockroach credit providers. Tighter monetary conditions are anticipating, they're anticipating more of all of these things. And as I said, it isn't just U.S. dollar parts of the euro dollar system. European banks were forced into a massive emergency shadow bailout of European euro denominated shadow banks for the same reasons and the same risks. So this global loss of macroeconomic momentum I keep talking about has showed up most prominently, as you might expect, in the goods economy. And it is showing up first in forward-looking indicators like sentiment surveys, things like PMIs. Now some of the other hard data looks decent by comparison because of those distortions. While forward-looking we're starting to get into, as I said, the lost momentum and getting past all those tariff distortions. Now we went over S&P Global's take on the situation in the U.S. where production remains positive, yet new orders have started contracting again, to the point that for SPG, the difference between them in December was the widest since 2009. Meanwhile, all of that output, which boosts short-run activity, has been shoved into inventories that, according to SPG, had been accumulating at the fastest pace on record in October and November and only slowing somewhat in December, but still adding to inventories even as sales started to fall off. SPG's top economists even went so far as to call it a wily coyote situation for the nation's producers. And when that's coming from S&P Global's economists, you know it's going to be a pretty serious divergence, therefore, again, loss of momentum. So today we get to ISM's version of everything. Unlike SPG, ISM hasn't had nearly as positive a take on the overall goods economy conditions during 2025, much less of a robust view of output and everything, even at the most artificial points of the tariff distortions. At best, the ISM reached 50.9, but that was all the way back last January at the apex of that first tariff distortion. So not even 51 at the high, yet the mainstream, if you recall, they had gone crazy with how the manufacturing economy was experiencing a renaissance, a rebirth, a full recovery, finally, thanks to, of course, JPOW, the Fed, and its rate cuts. Yeah, no, that wasn't happening. And keep that in mind as we go forward. It's a persistent theme ever since Forgot How to Grow first came up in 2022. Every little jiggle, every little fluctuation, each positive uptick, no matter how small it actually is, it gets immediately declared to be the beginning of a sustainable increase in economic, a recovery, an end to the malaise and stagnation. But it never actually is. Before then staging a smaller revival, if you can even call it that, back to 49.1 for September and the second tariff high. But since then, as you can see, the index has been tailing off again, losing momentum so that for December 2025, the latest data just came out today, the overall PMI dropped to just 47.9. That's the lowest since last October, and fittingly so, given that the manufacturing economy wasn't recovering. It's merely picking back up where it left off following a year, year plus of tariff and trade disruptions and the like. So orders continue to be weak, according to ISM, that index down below 48 for the second month in a row, while very importantly, ISM's employment index was less than 45 for the second month running. And the employment index has been 45 or less in five of the last seven months, which fits with the arrival of flat beverage and sustained job losses. So ISM says waning momentum echoed by the same scene in the Fed's regional surveys. It went over those previously with both of those a stronger signal to them than S&P, though the latter S&P agrees with the direction, the loss of momentum as 2025 comes to a close. So going outward from there, Canada and Mexico. So let's start with Canada. Canada has been at the margins, especially where it comes to the goods economy, highly susceptible to all of these shifts in trades and distortion. But also, even without trade wars, Canada at the margins is a huge reflection of what's going on in the U.S. It is a proxy for U.S. demand. And its manufacturing PMI managed a small increase for December when compared to November, but it only went to 48.6 from 48.4. And both of those were down from the second artificial high in Canada of 49.6 that was reached in October. And Canada's data like the ISMs had first peaked during the original, the first artificial tariff high back in December 2024 and January of 2025 before falling off into the summertime and then staging that second artificial higher, that second rise during the summertime. But now it's going lower again as all the trade war effects dissipate and leave producers with way too much inventory and the combination falling sales. Just listen to S&P Global's summary of the situation. The very first paragraph from their press release, quote, the performance of Canada's manufacturing economy worsened again at the end of 2025. Output and new orders fell as tariffs and broad market uncertainty, there's that term, continued to weigh on the sector. As I keep saying, the economy gets more certain, not more uncertain. Supply side delays were again apparent whilst the survey's price indices picked up since November and job losses were also reported whilst confidence in the outlook remained historically subdued. That does not sound all that good. And remember, Canadian manufacturing is a close proxy for U.S. demand. So you want to know why tips break evens are going even lower after going nowhere during what was supposed to have been tariff inflation summer? This is a good place to start piecing together that picture of waning momentum. So how about south of Mexico? It's actually worse down there. S&P Global says the critical production sector fell at the worst rate in Mexico since April. The headline PMI slid to just 46.1 in December, down from 47.3 in November. And the August high had been again, the summertime high 50.2. That's the artificial peak, the second artificial peak for Mexico. And outside of April, December's 46.1 is the lowest, the lowest since the start of 2022. And what did S&P have to say about the Mexican situation? This is going to sound familiar. Quote, Mexico's manufacturing industry ended 2025 in a much weaker position than it started the year with a faster contraction and new business intakes, causing notable cutbacks in production volumes and a steep drop in buying levels. Moreover, the latest contraction was the fourth in consecutive months. So the waning, waning after the second artificial high and the pace of contraction was solid and the quickest since July. Europe and the U.S. were cited as the main sources of weakness in international demand. Surprise, surprise, surprise. I said Mexico and Canada, proxies for, largely proxies for U.S. demand. I mean, that about sums it up. And remember, this is coming from an outfit whose soft sentiment surveys like these PMIs are typically optimistic outliers. They are the best case where it comes to forward looking perceptions. And looking forward, they are not looking all that good. So now over to Europe. Global trade bellwether, Germany suffered another setback in December. Again, notice the consistent pattern here, globally synchronized, which is a key note because Germany and Europe overall had been less tariff distorted in the middle part of the year than maybe Canada and Mexico and the U.S. to an extent. But even so, even where you don't have the same sort of tariff distortion or the same tariff distortion pattern from earlier 2025, here at the end of 2025, everything is synchronizing back up all over again. The waning momentum, not a good sign for 2026. So as far as Germany, not just as PMI either, and some of the hard data as well, a little different in respect that the tariff distortion kept going right past March and April, reflecting some of its local conditions, a brief uptick in German activity to the middle part of the year. But even so, just focusing on the PMI, it peaked at 49.8. It only peaked at 49.8. Again, during the summertime back in August, but since then, moving a little bit lower at first before now the familiar drop or the now familiar drop, the serious waning demand at the final two months of 2025. And once again, we don't need to go beyond the first paragraph of the press release from S&P Global for the full sense of what's shaping up or what's really shaping down in Germany, because it really isn't about Germany. Quote, Germany's manufacturing sector endured a further setback as 2025 ended with goods producers recording a decrease in output for the first time in 10 months amid a sustained decline in demand. The latest HCOB survey data showed the downturn, which was driven in large part by falling export sales, also led to deeper cuts to employment, purchasing and stocks of input. Now, I also want to point out Italy too, much the same as the rest, though a bigger downturn in December. Italian data, they suggested that there was some additional optimism, maybe even, you know, some additional activity beyond tariff distortions last year, which was one reason why the ECB, for example, kept saying Europe is in a good place, other than just basically lying about it and trying to get people to believe in the sentiment. With Italy, at the very least, there had been some small basis to begin thinking it could possibly be something like a turnaround, but that turnaround potential sharply turned around to close out last year too. Quote, the Italian goods producing sector closed the year in negative territory after having failed to sustain November's growth spurt. Setbacks were broad based in December, though largely centered around the renewed declines in manufacturers' order books, falling sales, and output volumes. In response to weaker sales, head counts, layoffs, flat beverage were lowered and buying quantities were reduced. I also want to note Switzerland, another global indicator, though this PMI, this sentiment data is not from S&P Global, but sure enough, it shows the same thing, the same general pattern anyway. From Bloomberg, quote, Swiss manufacturing activity, here we go, fell more than expected in December to a seven-month low. A purchasing manager's index dropped to 45.8 from 49.7 in November, marking three years below the 50-point threshold, separating growth from contraction, UBS and ProcureCH said on Monday. Economists surveyed Bloomberg had expected the gauge to stay close to its previous level, and once again we see how waning momentum, waning demand, waning order books, if not yet completely waning output, has forced a shift in the global economy, now that we're seeing it past all of the tariff distortions of 2025. So globally synchronized, not some corporate slogan, it was when it was originally showed up back in 2017, it was intended to suggest that the upswing in most economies at that time somehow represented a full recovery signal, finally a decade after the monetary panic in 2008 had broke them. Instead, all it indicated back then was a globally synchronized reflation, not recovery, not growth, and only a brief one at that, before more monetary tightening plus the lack of actual recovery forced a globally synchronized setback starting in 2018 with Eurodollar number four. Here in 2025 and now 2026, we've seen a number of tariff distortions and artificial highs going back the last 12 to 14 months, but now that we're moving past them, what was supposed to happen, of course, was the disappearance of tariff uncertainty would allow the world to get back to doing business as central bankers and economists saw it, and that is something like a globally synchronized growth, or at least it would be. Instead, the markets priced all along, the economy grew more certain, not more uncertain, and the monetary system now behaves more like a globally synchronized loss of momentum, and maybe a sharp one, more payback, not the start of some kind of recovery. So combine that with credit market cracks and cockroaches and the downswing in the cycle that are showing up in signals all across the Eurodollar system, especially in Europe, importantly, the European shadow bank shadow bailout, you combine that with this loss of momentum in the goods economy, and it is a forewarning about 2026 that is beginning on a globally synchronized wrong foot. In addition to S&P Global's wily coyote comment, the chief economist for Moody's admitted that nothing, and I mean nothing else, can possibly go wrong for the U.S. to avoid a full-blown recession. That's an optimistic take, and it's all in the video link below. As always, thank you very much for joining me. Huge thank you Eurodollar University members and subscribers, and until next time, take care.