Originally published by AxiTrader
Market Summary
The Fed hiked rates, signalled a clear plan to taper its balance sheet and largely delivered a message that it sees no reason to divert from the path it has set itself.
That was a little different to the outlook forex traders were expecting given the poor prints in recent US data flow. Indeed weaker than expected retail sales and CPI data saw bonds rally and the US dollar get hammered in trade before the Fed announcement and Janet Yellen’s press conference. Except for the Aussie and kiwi pretty much all of those gains against the US dollar were given back in post 4am trade this morning.
Whether the US dollar can continue to rally from here is an open question. But the Aussie is strong up around 0.75% at 0.7593.
Looking at stocks then and after new highs for the markets the S&P dipped 0.1% to 2437, the Dow Jones Industrial Average closed at a new record of 21,374 and the Nasdaq 100 lost 0.41% to 6194. Europe was down except for Germany and locally SPI traders have hammered prices back 29 points after yesterday’s solid rally.
On commodity markets oil has been crushed as inventory data disappointed again. WTI lost 3.7%. Gold was up but is now down half a percent and copper is down more than 1%.
Today in Australia we get the all-important jobs data. Jobs growth is the one thing that can really rescue Australian households and domestic consumption. So this is an important release. The market is expecting an increase of 10,000 jobs in May and an unemployment rate of 5.7%.
Tonight is all about the Bank of England and UK retail sales.
Here's What I Picked Up (with a little more detail and a few charts)
International
- The Fed’s interest rate and balance sheet normalisation process continued this morning. The FOMC raised rates another 25 basis points to a range between 1-1.25% while at the same time establishing the rules around how it will gradually reduce the size of the of Fed balance sheet at a time to be set in the future.
- The Fed still sees another rate hike in 2017 and up to 4 in 2018 as it looks through the weakness in inflation at present to a continued fall in the inflation rate. Chair Yellen in her press conference specifically called out the one off factors that have depressed the inflation rate this year. So with the US labour market expected to continue to strengthen and inflation expected to head back toward the 2% target – even if it doesn’t get there – the Fed expects to continue to tighen rates. The outlook is summarised in the FOMC’s projections table.
- The impact of the FOMC decision on forex and bond markets has been muted. That’s because traders have focussed on the weaker than expected inflation and retail sales data released earlier in the New York trading day. That data saw the US dollar get hammered and US interest rates rally hard. Just before the announcement at 4am AEST this morning euro was trading at 1.1271, USD/JPY was at 109.09 and the Aussie dollar was at 0.76215. They are currently sitting at 1.1215, 109.50, and 0.7590 respectively as the US dollar finds its footing. US 10’s were at 2.12% and are now at 2.14%, while the 2’s saw a low of 1.29% and are now back at 1.34%.
- In many ways the continued weakness in the US dollar will be encouraging the Fed to continue tightening. I say that because taken together with relatively low bond rates here US financial continues – even with the Fed’s tightening in the past 9 months – have loosened in the US. So I really do see this as a normalisation process for Fed funds. The question I always ask myself is where would rates be in a pre-crisis world with unemployment well below 5% and heading lower even with low inflation. The answer for me is 2% plus. That’s still well below the 3% rate a mechanical Taylor Rule for monetary policy might get you to.
- Anyway – there is a yawning gap between what the Fed is doing and saying and how the market – lead by weak data flow – sees the current and future outlook for the US economy. Tom Keene on Bloomberg TV said this morning the Fed is making it up as it goes. That’s harsh but it highlights that for all their communication the Fed hasn’t really communicated what it is doing. Normalising, and getting ready for an inflation pulse they see coming, not necessarily tightening based on the data they see before them. This disconnect is what’s keeping the US dollar offered and bonds bid. Even as the Fed continues to raise rates.
- They’ll wait now for the next hike – but look out for balance sheet tapering to begin in September.
- Looking at that data I mentioned in the US overnight and we saw a big miss on retail sales for May. The market was expecting a 0.1% rise but instead we saw a 0.3% fall. Similarly ex-auto’s a rise of 0.2% was expected and instead we saw a fall of 0.3%. That would be enough to undermine the dollar and see rates bid on its own. But throw in a 0.1% fall in headline CPI during May (0.0% expected) with the ex-food and energy number also missing to the downside with a 0.1% print. That’s seen the yoy rate dip to 1.9% in headline terms and 1.7% in ex-food and energy terms.
- And the data has also seen the Citibank Economic Surprise Index for the US fall again. At -57.3 this index is now at it’s lowest level since May 2015. No wonder the dollar is under pressure and bonds lower.
Elsewhere
- The battle between the hawks and the doves at the ECB continues. Overnight Austrian central bank chief Ewald Nowotny floated the idea that the ECB should abandon an inflation target and replace it with a range in which it tries to keep inflation. The point Nowotny is making about the management of monetary policy under the range compared to the target is that the former gives more flexibility on monetary policy. Or in other words right now would mean the ECB could dial back the stimulus.
- And the data in Europe continues to recover. Eurostat last night released employment data which showed jobs growth of 0.4% in Q1 to take the total number of employed people in the EU to 154.8 million. That’s the highest number of people in work since the first quarter of 2008 Reuters reports. Production data for the EU was also positive with Eurostat reporting a rise in output of 0.5% for April. The year on year rate did, however, fall from March’s 2.2% to April’s 1.4% as the big leap last year rolls off.
- Data in the UK however was a little disappointing for workers with the average earnings data undershooting expectations. The data showed that excluding bonuses the growth rate was just 1.7% against expectations of 2% in April on a 3 mths annualised basis.
- China’s triple treat of data yesterday was pretty solid. Retail sales were up 10.7% in May matching April’s pace and just beating market expectations of a 10.6% yoy increase. Likewise industrial production beat with a 6.5% yoy print versus the 6.3% expected. Urban investment was a little lower at 8.6% against 8.8% yoy expected and 8.9% last. The investment data won’t worry authorities nor will the loans data which showed a reduction in off balance sheet lending in May. It’s a sign that the authorities are gradually winning their battle with the Chinese economies speculative forces and that the economic transition is taking place without threatening overall growth.
- Indeed the IMF yesterday upgraded their expectation for 2017 growth to 6.7% from 6.6% previously
Australia
- Another huge rally for the S&P/ASX 200 yesterday saw the market rise 1.06%, 61 points, to 5833. The banks were again the stands out performers but the gains were pretty broad based as the markets momentum fed on itself. The SPI is down 33 points this morning implying the physical index will be back at 5800.
- It’s going to be interesting to see if that’s actually where stocks head. But given this buying has come out of nowhere with no decent catalysts fundamentally I can see there is every chance that a consolidation of the 150 point plus rally happens.
- Preparing for this note yesterday afternoon I was going to say the ASX200 faces monumental overhead resistance at 5,854. That remains the case but we’ll see how deep this pullback is first.
- On the data front yesterday the release of consumer sentiment really highlighted to me how the forces of debt and disquiet are weighing on households. There are still plenty of reasons to be confident that the economy will maintain momentum across the course of 2017 and maybe into 2018. Not least of these is the strength of the NAB’s business survey. But for me the fact that consumers are worrying about their financial situation increase the chances that as house price growth stalls there is a renewed focus on debt reduction. That would mean less consumption.
- Now for Australia’s jobs data today. More Australian’s in work is a good salve for household disquiet as well.
Forex
- The market expected a dovish hike from the Fed so the US dollar was under pressure as European traders put their feet under their desks. Throw in the weaker than expected data, the associated rally in US rates and we had the dollar under acute pressure as traders waited for the Fed. But my read of the Fed, of chair Yellen’s testimony, of it’s projection on employment, inflation, growth, and rates and I’d say this is a Fed that’s not showing any signs of deviating from the path it has set and the track to higher rates. So I’d say this was a hawkish hike. Something I suggested in a tweet yesterday afternoon.
- So we have the US dollar back at flat for the day and gaining. And when you look at the US dollar in DXY terms you see one heck of a long tailed candle which – given it was around recent lows - suggests we might be seeing a bottom.
- Likewise the euro high around 1.1295 before the collapse back to around the 1.1200 level is a huge reversal and another failure at the US presidential election night high of 1.1299. So it may be time for the bulls to take back a little of their longs and the bears to get their claws out to test where the true level of buying and support in the euro is. 1.1160/65 then 1.1100/10. If the latter level breaks watch out.
- Boringly for readers it’s pretty much the same story across the entire foreign exchange landscape. Whether it is the Canadian dollar, the pound, Swiss franc, Aussie or kiwi the Fed decision has seen them pullback from their highs against the US dollar this morning. Certainly, each of the currencies has their own drivers but in the last few hours everything has been overwhelmed by the US dollar.
- Well almost everything anyway. The Australian dollar and kiwi dollar are the clear leaders over the past 24 hours with solid gains, even after the pullback from the highs.
- The Aussie is at 0.7591 for a gain of around 0.75%. Things really started getting moving yesterday when the Chinese data printed solidly. That, in turn, saw the Aussie break up and through the range top at 0.7566 and then the buyers came. It’s a good example of how a quiet market can morph into a more volatile one – upside moves are still volatility – and how traders can pile in on a break. Where to now is interesting given the high overnight of 0.7635 was just 5 points below the 0.7640 level I’d highlighted this week. So target achieved essentially.
- The key now is the US dollar. I can see why traders have marked it higher after the Fed. But until the data turns around in the US the chances of a sustainable or material rally in the US dollar still seems remote.
- Worth noting, tonight we get the BoE which will be important for the pound. I’m expecting Mark Carney and his colleagues at the bank to look through the inflation spike and concentrate on the threats to growth
Commodities
- Inventories. Where oil prices head is, and remains, dependant on what inventory data tells us about market rebalancing and the efficacy of OPEC’s production cut. So it’s no surprise that after EIA data showed a smaller than expected draw in crude oil inventories and a build in gasoline inventories that crude has been poll axed once again.
- WTI is down 3.59% to $44.79 while Brent is down 3.41% to $47.06. That’s taken the WTI price back toward the bottom of the current downtrend channel and just a dollar above the recent low before the recent OPEC meeting and extension to the production cut.
- As I wrote after last week’s EIA data, given that OPEC looks like it has shot its bullets it really is only inventories that can turn the downward pressure on crude oil around in a sustainable fashion. Certainly there is clear technical support just below current prices but unless there is appetite from OPEC to come back and cut harder only inventory data can really turn prices around.
Have a great day's trading.