Bank Of England Readies The Starting Gun

Originally published by AxiTrader

Market Summary

The Bank of England left rates on hold but hinted it was very close to a rate hike. That sent sterling sharply higher, drove UK gilt rate higher and knocked the FTSE 100 down more than 1%. It also provided a mildly bearish tone for the US dollar and risk as traders grapple with the reduction of central bank policy accommodation across the globe.

US CPI edged back toward 2% which further raise the stakes for the fed and a December hike. While this didn’t help the US dollar – the pound had done the damage there – it did precipitate a cautious night’s trade in US stocks as traders wait for the Fed next week.

At the close the S&P 500 was down 3 points, 0.11% to 2,495. The Nasdaq 100 was off 0.48%, but the Dow Jones Industrial Average closed up 0.2% to a record high of 22,203. In Europe besides the FTSE’s 1.14% loss the DAX dipped just 0.1% while the CAC 40 was up 0.15%.

Somehow SPI traders here in Australia have reconstructed all those moves into a 9 point gain overnight. We’ll see.

On forex markets save for the pound there are not a lot of changes day on day. The Aussie dollar did have a rollercoaster ride overnight however after employment induced strength gave way to metals induced weakness. It’s at 0.7993 this morning.

On metals, copper is down 0.68% in what was a seas of red across global metals markets. iron ore lost ground again as well dipping more than 2% on the Dalian exchange. Gold is a little better bid and oil surged only to run into solid resistance and halve its gains.

US retail sales and industrial production the highlight for the trading day ahead.

Breaking as I'm about to hit publish: Treasury Secretary Steven Mnuchin, speaking during a Politico forum, told the audience:

"Although we respect the Fed’s independence, we are concerned about economic growth. We’re doing everything we can -- whether it’s tax reform, whether it’s regulatory relief, whether it’s trade -- to create economic growth. And we’re less concerned about inflation at the moment."

USD/JPY fell initially in the news and gold rose a smidge. But to me this reads like an administration that is simply making the case that the economy needs tax cuts - recall Mnuchein said a day ago that they pay for themselves with growth - while at the same time saying the extra stimulus won't accelerate inflation. Thus it won't cause rates to rise.

Anyway.

Here's What I Picked Up (with a little more detail and a few charts)

International

• The Bank of England, and the associated move in the pound is the big macro news overnight. The MPC left rates on hold with a 7-2 split but signaled that the economy was not as weak as they had feared a month ago. It also said that there were signs that after a lull – induced by inflation – consumer spending was making a comeback. As a result the bank said “some withdrawal of monetary stimulus was likely to be appropriate over the coming months”. Sterling roared, gilt rates rose sharply, and the FTSE slumped as a result

• Mark Carney’s comments then further drove these moves. The BoE governor said, “What you heard today is that the majority of members of the committee, myself included, see that that balancing act is beginning to shift, and that in order to return inflation to that 2% target in a sustainable manner there may need to some adjustment of interest rates in coming months. We'll take that decision based on the data, but yes that possibility is definitely increased”.

• Carney also added something that might be interesting for the RBA at some point in the future given that expectations about “potential growth rates have come down. Carney said the “speed limit” had come down which means the first hike can come when the economy is “not growing quite as fast as it would have done in the past”. But I’d bet you have to have the inflation to justify that first. Otherwise it’s a very different conversation.

• US CPI edged back toward the Fed's 2% target overnight with a rise of 0.4% in August which took the year on year rate back to 1.9%. Core inflation is rose at 0.2% and 1.7% for the respective periods. It’s data which suggests that Janet Yellen may not has misused the word “transitory” earlier this year to describe the slowdown in the economy. It’s also increased the market pricing of the chances of a December rate hike back above 50% according to the CME’s Fedwatch tool.

• In Europe overnight, we heard from more ECB speakers who suggest the time to ease out of QE is near. Belgian central bank governor Jan Smets said the inflation rate has bottomed while Bundesbank president Jens Weidmann said it’s time for the ECB to ease “up on the accelerator” of stimulus. “We're not talking about a complete stop in monetary policy, but rather of easing up on the accelerator… the ECB Governing Council must be careful not to miss the right time for normalising policy,” he said. Slovenian CB governor Bostjan Jazbec agreed but was a little more circumspect noting, “We need more data and more confirmation that what we are doing is in line with fulfilling our mandate”. Clearly the time for QE has passed. The ECB is simply navigating this path so as to not send the Euro into orbit and thus undermine either the economy or its inflation mandate.

• Chinese data yesterday was on the weaker side of the ledger with urban investment (7.8%), industrial production (6%), and retail sales (10.1%) all missing to the low side. Naturally these are still solid numbers for a developed nation. But the key here is that traders react to prints versus expectations not the data per se. So this data – coming after some other weaker prints earlier this month – impacted sentiment about the Chinese economy and metals and iron markets, among others. The yuan lost ground initially but it’s regained most of that as the US dollar game under a little pressure overnight.

• The OECD upgraded French growth prospects for this year and next overnight. The 1.7% the OECD expects this year is still anemic but it’s the best since 2011.

• And on the kiwi election. A One News poll released in the past 24 hours differed to the most recent poll traders reacted to in that it showed Labour’s support rose 1% to 44% and in with a shot of winning the election.

Australia

• The local market fought back to finish down just 6 points yesterday at 5,738. It was a fairly tight range on the day for the 200 index even though many of the underlying stocks and sectors had big moves. In a macro sense they essentially canceled each other out to lower volatility at an index level, which is the point. Right?

• SPI traders are a little more positive this morning however and have added 10 points from where things ended yesterday afternoon. I’m cautious of that given the universal weakness in metals and iron ore overnight although I note gold is a little better bid and oil prices are higher as well. We’ll see what traders want to do to end the week after a neutral to negative lead from the US and Europe.

• Looking at price action 5,765/75 is resistance in the physical S&P/ASX 200 with support at yesterday’s low of 5,725/26. It’s a similar story with the SPI – Wednesday’s high and yesterday’s low as the parameters.

• Yesterday’s employment report was strong. Very strong. The Australian economy generated 54,200 jobs in August on a seasonally adjusted basis data from the ABS showed. That brings the total jobs created this year to 268,300 at an average of 33,500 per month. That’s well above the 5 year average of 15,300. That’s an unequivocally strong performance of the labour market. RBA governor Lowe suggested in September this strength is already causing wages to rise in pockets and that the “Reserve Bank's central scenario is that, over time, this will become a more general story”.

• So the chances of a rate hike in 2018 have risen materially. Naturally that assumes this strength in the employment market continues – as the NAB business survey suggests it might. And it flies in the face of what RBA board member Ian Harper said just a couple of days ago. But if governor Lowe and his colleagues are right about growth, wages, and by extension inflation, then with a solid global growth environment the conversation will be changing in the months ahead.

Forex

• Despite the CPI data increasing the chances of a December rate hike the US dollar lost ground overnight. In US dollar index terms the US Dollar Index is down 0.41% to 92.14. Euro has only gained 0.15% to 1.1903 and the Japanese yen is largely unchanged at 110.42, while the Swiss franc is similarly becalmed at 0.9641.

• Sterling was the big mover however and shot higher on the back of the BoE decision, statement, minutes, and Mark Carneys comments. The sense is the BoE will soon remove the emergency measure it took in the wake of Brexit. And let’s face it, if the economy is not as weak as the bank thought, and it is worried about inflation then a small tightening and a sterling surge will help it achieve its goals. GBP/USD is up 1.43% at 1.3398. It’s now broken the down trend from the pre-Brexit high around 1.50 and while its running into resistance that is an important break if the pound closes the week above 1.3280 which seems likely.

• Of the commodity bloc the AUD/USD caught a bid after the super strong employment data yesterday and ran above 80 cents to a high around 0.8015 before coming under heavy selling pressure overnight and trading all the way down to 0.7955. It’s back at 0.7990 for a gain of around 0.1% but looking a little offered.

• The kiwi is off 0.23% at 0.7221 while thee Canadian dollar is largely unchanged with USD/CAD at 1.2174.

Commodities

• Crude oil had a great night as traders acclimatise to the fresh news of market tightening and increased demand expectations. That saw WTI trade well north of $50 a barrel making a high around $50.50 before pulling back. WTI is at $49.72 this morning – up 0.85% - but looking like it might have had a false start, or break. Brent was higher as well but is now up just 0.16% at $55.25.

• Technically, WTI needs to take out resistance and the range top.

• Gold has benefitted from the US dollar weakness and I think also a little bit from the DPRK saying it was going to sink Japan with nuclear weapons yesterday. Seriously, these toys need to be taken off that child before millions of people get hurt.

• Copper was hammered down to support yesterday along with all metals on the Shanghai exchange and Dalian iron ore. Weaker than expected Chinese data was the catalyst for the continued reversal and more selling as traders look for the real levels of support after some very strong rallies in the sector. As it stands this morning copper is down 0.68% at $2.94. Iron ore fell 2.28% in Dailian and 1.65% in US futures overnight to $74.94

Have a great day's trading.