Originally published by AxiTrader
Market Summary (7.46 am)
I’m not going to pretend I have a clue this morning.
CPI was higher than expected, both in the monthly core (+0.3%) and headline (+0.5%)rates, US 10's are at 2.91%, the 2's are at 2.17%, the curve is thus at 74 points. But stocks have surged and the US dollar has been pole axed. That’s even though the market expectations of a March hike increased to 83%, June to 57%, and then a third in September to 36%.
Oh and apparently according to some dude from CNN even though CPI shot the lights out with a 0.5% print for January and 2.1% yoy it simply “confirmed” it didn’t surprise. Ahem, Mr ex-poste. If prices had have stayed where they were shortly after the release we’d have a very different narrative.
Now, don’t tell me this is all about the miss on retail sales, though it was a big miss I’ll grant you (-0.3%). Because if it is about retail sales then why are stocks excited by the prospect of higher rates and a slowing economy. That doesn’t exactly sound like a recipe for a surging stock markets. But I guess JP Morgan’s forecast of 2.5% and the Atlanta Fed’s GDPNow guesstimate of 3.2% aren’t exactly weak.
Anyway, so the wash up is the S&P 500 is up 1.35%, the Dow has risen 1.08%, and the Nasdaq has fairly soared 1.87%. All that money that rushed out of stock funds last week must have rushed back in. Although the volume data I’m looking at as I write says that’s not the case. At least on the S&P.
European stocks were higher as well with the rally starting while they were open and with reasonable data from Europe itself. At the close the DAX was up 1.2%, the CAC was 1.1% higher, while the FTSE was 0.64%.
Naturally after a disappointing day on the ASX yesterday SPI traders are betting on a very solid day here in Australia adding 45 points to 5,835. They're probably right if FOMO is back and we are melting up again.
Nothing to see here move along sell dollars and buy stocks. Bonds be damned!
One day, one swallow, does not a summer make. But last night’s price action is instructive across a raft of asset markets. Is the new paradigm that bonds don’t matter now when they did just last week? Give me a break. This Facebook (NASDAQ:FB), Instagram, Snapchat instant gratification world is doing weird things to investors' heads.
Price action wise I get it though. The S&P 500, euro, Aussie and many other assets hit really important levels before reversing from around 4-5am my time Saturday morning. Indeed all these assets were lower in the aftermath of the CPI. But then they reversed – perhaps the best explanation is bonds didn’t tank.
Fundamentally though, nothing matters, until it does. Keep that in mind with bonds folks.
Anyway.
On Forex markets the dollar has been absolutely punished in the past 6 hours since the data was released. Actually the initial reaction of traders was to buy US dollar but that was swiftly reversed. With the euro trading from 1.2275 up to 1.2453 now for a gain of 0.84%. Sterling has made a similar move and is at 1.400, while the yen is slipping under 107 again now. Of course the Aussie has gone along for the ride given this is generalised US dollar weakness – it’s up 0.87% at 0.7927 as we wait for employment data today.
Proof though that this is all a lower volume bang for your buck move though might come from the moves in the kiwi (+1.32%), Korean won (+1.28%), and Brazilian real (+2.35%). All are smaller, less liquid versions of the same trade as the Aussie but have outperformed.
On commodity markets, everyone loves a lower US dollar. Copper is through the roof with another big lift rising 2.2% overnight to follow the previous days 2.45% rally. Aluminium, Nickel, Lead, Zinc, and Tin were all higher too. Iron ore is similarly buoyant and gold has shaken off the bond rise, focussed on a weaker US dollar and some say rising inflation (its long held source of value as a financial asset) and XAU/USD is up 1.85% at $1354 as a result. Oil is also higher on lower than expected EIA build in inventory and some more soothing words from the Saudi’s. WTI and Brent have gained 2.62% and 2.74% respectively.
On the day today we get Australian employment data for January with the market looking for the standard 15,000 new jobs and an unemployment rate of 5.5%. Tonight it’s jobless claims, NY Empire and Philly Fed manufacturing indexes along with PPI, industrial production and the NAHB housing market index in the US.
Here's What I Picked Up (with a little more detail and a few charts)
International
- The higher US CPI print did set the cat among the pigeons overnight. But just not for very long. I’ve read and listened to many commentators ex-poste rationalise the bounce in stocks and the selling of the US dollar. Mostly it seems to come down to, “bonds didn’t sell off too much”. Maybe. but it has a ring of after the fact fitting a narrative to the price action. And quite frankly I have no idea why we saw the big bounce in stocks and massive selling in the US dollar other than this lack of reaction in US bonds. So I am going to give that some credence for today.
- That’s because, as Dennis Gartman always says, if a market does not react bearishly to bearish news (or bullish as may be the case), then it is NOT a bear market. And that is the best and only real takeaway I can garner from last night’s price action. Bonds didn’t really sell off, stocks did but then stopped, and the US dollar was bid and then reversed. So for all my disquiet with these moves this morning I always respect the price action.
- Medium term though I am looking for US 10’s to head toward 3.10% - well see how sanguine markets are then. Here’s the chart showing the set up. 10’s ran to 2.88%, dipped to the 38.2% retracement level of the run, and now have broken giving me a Fibonacci projection of the break to the 1.382% level of 3.10%
Australia
- The Westpac consumer sentiment data yesterday reconfirmed to me that the Australian economy is actually doing okay and households are in reasonable shape – regardless of all the hand wringing. I say that because even though sentiment dipped back a little on the month, something Bill Evans said was a result of stock market volatility during the survey period, it was the continued improvement in consumers feelings of job security which to me is the key. Uncertainty is poison in households and in economics. So when Australians feel less likely to lose their job then one area of household uncertainty is reduced.
- What’s important here is that not only is the unemployment expectations index still falling, it is also below the long run average. So Australians are feeling less worried about their jobs than they usually do and by a decent margin. That, and the growth in employment, has to go some way to assuage the fears about households. Wage rises would be good. But when they comes – as I believe they will later this year – this data suggests we have a very solid base from which Australian households may be prepared to spend.
- Looking at the SPI now and it should be a good day ahead on the ASX after yesterday’s drag. SPI traders have added 44 points at present and price is back at the 50% retracement level of last week’s rally and above the 200 day moving average. A move above 5,836 today opens up the chance of a move to 5,892 and then above that the bottom of the range till last week’s fall at 5,922. That might be a stretch right now. But the moves in base metals, in gold, in oil, and in global stocks should all support trade today. Here’s the SPI:
Forex
- The US dollar is in full retreat today as trader sell with gusto despite the CPI release and what it implies about the Fed. It seems the ability of the the euro to hold 1.22 last week is the key to this move as it recovered along with stocks from mid-afternoon last Friday in what is now a cumulative 250 point move higher. There remains much talk of US twin deficits and that the push higher in US rates was accompanied by rising rates in Germany and other jurisdictions. There is still precious little credence given to any notion of real policy divergence this year and next between the fed and other central banks which I find really interesting. It tells you folks just want to sell dollars.
- Indeed I think Bill Evans, Westpac’s chief economist, summed it nicely in a piece he released yesterday on the Fed and the spread that we’ll end up with against the RBA, Aussie rates, and thus its impact on the AUDUSD rate. Bill wrote, “My discussions in the US showed widespread negativity around the US dollar. Arguments against the US dollar hinge around widening budget and current account deficits; political uncertainty, including potential political interference with the FED; and ECB and BOJ tightening. Notwithstanding this sentiment, we continue to favour our positive US dollar view. In 2017 Europe and Japan ‘s growth rates exceeded potential by sharply more than did the US. (more than 1% compared to around 0.5%).The US dollar fell an extraordinary 11% through 2017. The story will be different in 2018. US growth is expected to exceed potential by 1.3% as Europe and Japan slow. We are also less convinced than many commentators and certainly a range of the people I met in the US around any imminent tightening by either the ECB or BOJ. That is in sharp contrast with our FED view”.
- I agree 100%. For the moment the market does not, and the euro, US Dollar Index, and other pairs are biased back toward recent highs/lows to test if this recent US dollar move wasn’t just a pause before another big plunge. Price action has primacy over rhetorical views. So Bill and I will just have to wait a little longer before we see if we are right. And crucially if forex traders and forex markets care. A break of the recent lows in DXY terms suggests a move to 86.00/50 which is both a fibo projection of a smaller move and where the trendline from 2011 sits.
Have a great day's trading.