Dow 22,000 As Debate At The Fed Still Rages

Originally published by AxiTrader

Market Summary

Dow Jones Industrial Average 22,000. Who’d have thought that in a world where Trumponomics is stalled at the start line? But that’s what we have this morning after the Dow gained another 0.24% overnight to close at a new record of 22,016. The Nasdaq and S&P 500 weren't as excited with the composite index closing flat at 6,362 while the S&P rose just 0.05% to 2,477.

European stocks were lower across the board. But SPI traders are betting that yesterday’s weakness will wash away when the market opens this morning. They’ve marked prices up 10 points overnight.

On forex markets, divergence remains the key. The US dollar made a fresh low in US Dollar Index terms, against the euro, and against the pound. But the Swiss franc, Japanese yen, and the commodity bloc lagged those moves. The Aussie is this morning back in the mid 0.7960’s – largely unchanged – after a low around 0.7942 yesterday.

On commodity markets iron ore dipped back yesterday on concerns about the sustainability of the rally. Oil is higher even though inventories fell less than expected. Gasoline demand was the key driver, which sent WTI 0.69% higher. Gold needs to hols above $1,262 and copper is hanging tough at $2.88 a pound.

On the day ahead we get services PMI and trade in Australia. Services PMI’s are out across the globe as well.But the BoE meeting, governor Carney’s speech, and the inflation report are the likely highlights in the next 24 hours.

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

International

• We received some further guidance from a number of Fed speakers overnight that even though there is still some debate about how much and when the next rate hike might be there seems to be a solid agreement that the balance sheet reduction will happen soon. St Louis Fed president James Bullard, a noted dove, said “I don't think we have to do anything on rates now…There's only one thing left for us to do which is to start normalising the balance sheet - in my view of the world, this is kind of the natural next step”.

• And balance sheet reduction was something San Francisco Fed president John Williams also. Williams said balance sheet reduction is “baked into the cake” for markets. This is important. Many believe that the run-down in the Fed’s balance sheet can be done in an orderly manner and without any hiccups. But what the Fed does by not reinvesting is to take itself, a significant buyer and force for lower rates, out of the markets. All other things equal that naturally biases bond rates higher. Already last night the US Treasury announced its plans for issuance when the Fed begins the taper. They’ll be issuing more in the short term part of the curve it seems - so they know it will have an impact on rates.

• Equally, if the growth in the balance sheet had stimulatory effects on the economy – and clearly stocks - then why would the reduction in balance sheet size, not act as a de facto tightening. We know it will. I’m not convinced the market recognises this fully at present. Certainly not forex traders.

• Also speaking last night was Loretta Mester, Cleveland Fed president, who channelled Janet Yellen’s June press conference saying temporary and one off factors had pulled down inflation and as a result the Fed needs to keep raising rates. While Boston Fed president Eric Rosengren has given an interview to the Wall Street Journal where he says the tightness in the labour market (UE could fall below 4%) means the Fed path of higher rates is still the right one. He also said the time to draw down the balance sheet is here noting “there’s no reason to have that extraordinary accommodation coming from the balance sheet any longer”.

• Also in central bank speak, yesterday we heard from BoJ board member Yulitoshi Funo who said the inflation target of 2% is no longer time constrained and that he doesn’t “expect prices to surge suddenly any time soon”. My take on that is Funo is another voice highlighting that Japan will not be moving away from current policy settings anytime soon.

• President Trump signed congresses Russia sanctions overnight (North Korea and Iran are also impacted) but he said he thought the new sanctions were “flawed”. It’s just another pop at Congress after he went after GoP Senators over the weekend after the failure to repeal Obamacare last week. This is important for the Trump agenda as the president is pushing the two sides of American politics together in a way he may find uncomfortable in the future.

• And speaking of Trump, watch the China sanctions story. The president is not all wrong here – especially on IP – but he appears to ratcheting up the pressure on China as a result of their inability to rein in North Korea. He’s just opening up another front, and another fight.

• And don’t forget China and India are facing off over territory as well. Geopolitics is unstable in a Trump world it seems.

• NOW to the DATA: ADP jobs printed 178,000 for July which was just shy of the 185,000 expected and came after an upwardly revised 191,000 (from the original 158,000 reported). So it wasn’t weak data even though it was used as an excuse to sell the US dollar.

• In Europe PPI growth slowed materially in June with the 0.1% fall in monthly prices dragging the year on year rate from 3.4% in May to 2.5% in June. It’s worth noting April PPI was running at a yoy rate of 4.3%. This is important for the ECB and highlights what Mario Draghi has been saying for months. Yes growth has picked up but inflation remains low. Don’t forget the ECB is an inflation targeting – exclusively under mandate – central bank.

Australia

• Yesterday’s move on the S&P/ASX 200 was textbook – at least if that textbook is about how markets trade inside wedge patterns. Having had a solid lead from European and US stocks SPI traders were already cautious about the outlook marking prices down this time yesterday. So at the close of play there was no real surprise that the ASX200 dropped 0.49% for a 28 point loss to close at 5,744.

• There were 116 losers and only 65 gainers in the 200 index with technology and basic materials leading the way lower. Only the industrial segment ended higher. The Banks were lower, the miners too as iron ore drifted lower in Chinese trade. Rio Tinto (AX:RIO) did relatively well compared to its peers but even a bumper cash splash for shareholders delivered in its earnings report after the bell couldn’t paper over lower than forecast cash earnings results. Rio stock fell 2.82% in London as a result.

• Yet this morning SPI traders are bullish – even though the S&P is flat and Europe fell - with prices up around 6 points from where they were yesterday afternoon. We’ll see.

• The wedge is holding – only a break and hold above, or below as may be the case, will get traders excited.

• Yesterday’s building approvals data wasn’t terrible with a solid rebound of 10.9% in June after May’s 5.4% fall. That was much better than expected and gave me pause to wonder just how big the approaching construction cliff will or will not be. Luckily David Scutt over at Business Insider – with a little help from the economics team at the NAB had done some homework. Scutty reported the NAB said “While a lot of the focus on the cycle to date has been on the apartment market and the cooling in development projects over the past year or so, it’s becoming evident that detached home approvals are now trending higher in New South Wales, Victoria, and Queensland, likely reflecting the improving labour market and population pressures”. That’s important for the economic outlook, the RBA’s 3% forecast, and why maybe an 80 cent Aussie is nowhere near as restrictive as some folks thing.

• Today we get trade data for June. The market is expecting a $1.8 billion surplus for the month. AiG performance of services PMI is also out. Both are important

• Oh and I’ve run out of time but take a look at what South Korea has just done with capital gains tax for folks who own more than one home. It’s a brilliant idea and coming after yesterday’s HILDA release showed how hard it is for under-40’s in the housing market I think Australia should look at something similar. It preserves the sacred cow of negative gearing and works on tax at the sale point. It’s a great idea.

Forex

• The US dollar made a fresh low in DXY terms and against the euro for this run overnight printing 92.40 and around 1.1909 in overnight trade. It’s recovered a little from these lows but is still down on the day against the euro (1.1850) and pound (1/3219). The key here seems to be about central bank moves and what and when they might adjust rates.

• Tonight the BoE meets and even though no-one really expects a move the MPC is likely to again record a split decision signalling the move to tightening is still on track. Likewise, forex traders continue to believe the uptick in growth across the EU will pressure the ECB to abandon emergency measures. I have great sympathy for this view. But the ECB is a single factor central bank with an inflation mandate. What to make then in the 0.1% fall in PPI during June and the deceleration in yoy growth from 3.4% to 2.5%?

• But as I wrote in Forex Today yesterday, there is a divergence happening in forex markets which suggests traders are being more discerning about many US dollar pairs as they hit multi-year highs against the US dollar.

• So this morning we have the Swiss franc lower with USD/CHF up at 0.9710 for a gain of a little more than half a percent. That’s driven EUR/CHF above 1.15 – oh how the SNB must be cheering.

• The Japanese yen is also a little lower. Comments from the BoJ on the open ended nature of the inflation target suggest enduring monetary accommodation and that’s important for forex markets right now. At 110.60 this morning USD/JPY is mid-range, but higher, over the past 24 hours.

• Looking at the commodity bloc USD/CAD is a little higher at 1.2568, the kiwi remains under a little pressure after yesterday’s miss on employment at 0.7429 this morning while the Aussie dollar has fought back hard from a low around 0.7942 and is trading at 0.7962 this morning. That the Aussie buyers prevailed above Friday night’s low around 0.7936 is important. Today’s trade data will be a key driver in our time zone today.

Commodities

• The EIA inventory data in the US showed a slighthly lower than expected drawdown in crude inventories of 1.527 million barrels against expectations of a 2.957 million draw. But prices are higher this morning for WTI and Brent after EIA data showed a big draw in gasoline inventories of 2.5 million barrels – against expectations of a 525,000 fall. Additionally the EIA also estimated that gasoline demand hit a new weekly record of 9.842 million barrels.

• And it was this gasoline demand that traders appeared to hang their hats on. The result is that WTI is up 0.69% to $49.50, while Brent was 0.97% up at $52.25.

• In other data overnight OPEC output hit a high for 2017 output of 33 million barrels per day according to the latest Reuters survey which showed an uplift from Libya, and Iran, among others. Russia appears to be keeping its part of the deal with OPEC as production remain static at 10.95 million bpd in July.

• Gold is still trying, but not succeeding, to break higher on the back of the relatively weak US dollar. But at $1,265 it’s increasingly looking like gold may have formed a wedge pattern that, if $1,262 breaks, would suggest a resolution to the downside.

• Copper continues to consolidate after a stellar run higher. It looks like it needs a pullback and technically the key level I’m watching on the dailies is $2.84 a pound. While above that level however traders won’t be ruling out a further run toward $3 a pound.

Have a great day's trading.