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ECB And Fed Speakers Reiterate Divergent Outlooks For Rates

Published 13/10/2017, 09:56 am
Updated 06/07/2021, 05:05 pm

Originally published by AxiTrader

Welcome to my overnight markets wrap.

Again coming to you from Koh Samui – I really couldn’t recommend the island more highly.

Feedback always welcome

Greg

Market Summary

US stocks drifted lower overnight despite what appeared to be reasonable earnings beats from some of the major US banks. In the end though the S&P 500 dipped 0.17% to finish at 2550, the Dow Jones Industrial Average closed down 0.14% at 22,841 and the Nasdaq 100 ended at 6069, down 0.19%.

Europe was a mixed bag and after another positive day yesterday took the ASX toward the top of the multi-month trading range SPI traders have knocked just 2 points off yesterdays prices.

On forex markets its been interesting as multiple central bank speakers from the Fed and ECB plus a solid 0.4% print for US PPI coalesced into a marginally stronger US dollar against the euro, Canadian dollar and yen. Sterling had a wild ride on Brexit rumour and anti-rumour but ended higher while the Aussie and kiwi were both stronger as well. Global growth never hurt these pair.

Bonds are fairly calm while on commodity markets the tiger tail saga for oil traders continued. WTI and Brent both fell heavily again. Gold was a little stronger but failed at resistance and copper lifted along with metals more broadly.

US CPI release looms large as a very important pointer to whether the Fed is likely to be able to follow through on its mooted December hike and the ones to follow. That in turn has implications for bond rates, and the US dollar. So it is a big end to the week. Not to mention today’s release of Chinese trade.

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

International

  • US PPI came in with a 0.4% increase in September which was as expected and kept the year on year rate of PPI growth at 2.6%. Certainly there was some hurricane induced increases in the data but the core number was strong and year on year core PPI growth accelerated from 2% to 2.2%. The market is now waiting on the more important CPI data which will be released tonight. But clearly producer prices are rising.

Chart
US PPI yoy (source: TradingEconomis.com)

  • It was central bankers at 10 paces over the past 24 hours. In the US St Louis Fed president James Bullard was out speaking for the doves saying the Fed should defend its inflation mandate by waiting to see inflation rise before hiking. But Fed Governor Jerome Powell reiterated what I think is the dominant view that the fed should continue the path of policy normalisation while the economy continues to evolve as expected. CPI tonight is going to be important to both views, and to the markets – especially forex traders.
  • In Europe both ECB President Mario Draghi and Chief Economist Peter Praet stressed that rates in the EU will remain lower for longer even once QE ends. Praet said that the ECB’s outlook for the economy and for growth and inflation is based on low rates. That’s something Draghi reiterated saying “Based on our regular economic and monetary analyses, we decided to keep the key ECB interest rates unchanged. We expect them to remain at their present levels for an extended period of time, and well past the horizon of our net asset purchases." That is rates will stay low well after QE has ended. But the Bundesbank’s Jens Weidmann is still not sure this is appropriate policy. It will be an interesting meeting in a couple of week’s time.
  • Elsewhere the pound had a rollicking ride as traders worried that Brexit would be hard, then a Handelsblatt article suggested instead the UK may get its 2 year transition. Now I don’t speak German which means I have to rely on Google (NASDAQ:GOOGL) translate to give me the English language version of the story but I find the exerpt at the start of the story tells a truer tale than perhaps traders grasped. “The British could stay two years longer in the internal market - with all obligations, but without voting rights. In the fifth round of the Brexit negotiations, little progress was made” the website said. In layman’s terms that just means “sure you can stay in, as long as you do what you are told, don’t complain, and don’t think you have any say in what’s going on”. What a deal hey. Anyway it may not come to that because the FT reported any soft Brexit deal will get scotched at next week’s meeting of the other EU members, anyone of who could block such a move.
  • On the Trump tax plan. Steve Mnuchin again said its on track but Business Insider reported that another Republican Senator is against the probable increase in the deficit that comes with it. In the end if this is a hands across the aisle deal that may not matter. We’ll have to wait and see.
  • And quickly on US stocks. I would have though those banking beats released last nght might have buoyed the market which instead drifted a little. IT’s worth noting the chart of the S&P 500 against that trendline from 2011 again as we end the week. As I noted earlier I am not calling a top. But how earnings season goes and crucially how the market reacts to the company earnings announcements is going to be instructive.

Chart

Australia

  • 5795. That close yesterday off the high has taken the S&P/ASX 200 back to the top end of the range the market has traded in since June. That the market did it while iron ore was again under pressure is a testament to how sentiment has swung back and forth over recent months.
  • But when the banks are rising it’s like a turbo charge in the rest of the market, like a tide that washes away all sins. So this if investors like the banks again - and why wouldn’t they after this week’s NAB business survey, Westpac consumer sentiment, and yesterday’s housing finance figures all point to strong operating conditions - then maybe the market can have a pop at the 5833 range high. Perhaps it might even break higher given the positive global growth backdrop which suggests it would take an awful run of policy errors to knock the Australian economy over at present.
  • Looking at the chart and we see that in SPI terms at least we’ve touched the top of the range with the SPI trading to 5774 over the past 24 hours - it’s highest level since Septembers aborted attempt to break the range. So the range has held for now. SPI traders aren’t sure this morning with prices 2 points off from yesterday’s close. 5808 then 5933 are important in the physical and 5774 for the SPI.

Chart

  • And speaking of housing finance. Boom, what a number yesterday as monthly turnover for home loans hit a new record of $33.9 billion in August up 2.1% seasonally adjusted month on month. That has no taken the year on year increase in system wide housing finance up 8%. The RBA will have noticed the return of investors to the market with the ABS reporting investor loans rose 4.3% during the month. We can scratch off any chance of a rate cut from the RBA unless the Australian economy absolutely tanks.

Forex

  • US CPI is going to be very important for the dollar, and by extension forex markets, as we end the week. Forecasts are for an increase in US consumer prices of 0.4% month on month during September with a year on year rate of 1.9%. Core is naturally lower on both counts at 0.2% and 1.7%. A material deviation in either direction will get the attention of and a reaction from forex traders. It’s likely to confirm or deny this week’s bout of US dollar weakness. 92.55 looks like an important level to watch in US Dollar Index terms.

Chart
USD Index - DXY (Source:Investing.com)

  • The CPI is important because that in turn drives outlooks for the relative moves of the Fed, ECB, and other central banks which in turn feeds into bond rates, yield curve slopes and forex rates. But with the euro still above 1.18 even though it’s clear the Fed is settling toward a December rate hike and even after Mario Draghi warned that rates in the EU will stay low for a long time past the end of QE it is clear that US data flow needs to continue to feed the markets somewhat weak belief that there will be enough divergence to matter to the EUR/USD rate. The Euro is around 1.1830 this morning and a break of 1.1790 would be a signal a move back toward last week’s low might be on again.
  • USD/JPY is looking interesting. And not in a good way for the shorts. It’s now spend the past 2 days trading inside Tuesday’s range. It’s still choppy, and the bias is still lower on my system but while 111.90 holds the chance of a bounce back seem elevated.

Chart

  • GBP/USD had a wild ride last night trading through a 170 point range as traders worried about a hard Brexit and then were exalted by reports in Handelsblatt that the EU may indeed grant the UK its 2 year transition plan to Brexit. At 1.3267 its up 0.35% day on day.
  • Looking at the commodity bloc now and it’s been a good 24 hours for the Aussie and he kiwi. The NZD/USD is atop the leader board of the major traded forex pairs with a gain of around 0.6% to 0.712. Technically it’s broken a steep little downtrend and amove to the 38.2% retracement level of the latest fall can’t be rulled out. That would suggest 72 cents is now a chance. USD/CAD is a little higher as the Canadian dollar lost ground under the weight of a stronger US dollar and falling oil prices. It’s at 1.2475 this morning.
  • The AUD/USD climbed to the second of the two targets yesterday making a high around 0.7835 before dipping back a little to 0.7820 this morning. It’s been a better week for the Aussie with more positive data reinforcing the RBA, not the bears view, on the outlook for the economy while the last 24 hours price action in metals is also supportive. Today’s Chinese trade data will be important in the short term but if 0.7840 gives way a run toward 0.7880/85 could occur.

Commodities

  • When is the IEA saying the market will be in balance during 2018 bad for oil prices? When it appears to imply both that this balance is taking longer than OPEC probably expected, and when it comes with a warning from the IEA that implies that perhaps current pricing is correct with limited topside.

Chart
EIA Projections

  • In its monthly report overnight the IEA said “our current numbers for the first quarter of 2018 imply a stock build of up to 0.8 million barrels a day (mb/d). Taking 2018 as a whole, oil demand and non-OPEC production will grow by roughly the same volume and it is this current outlook that might act as the ceiling for aspirations of higher oil prices," it added that the result was "leading oil producers will have looked at their market balances and probably drawn the same conclusion".
  • The washup was that even though US crude inventories fell a more than expected 2.7 million barrels WTI has fallen 1.21% to $50.68 and Brent dropped 0.98% to $56.38. Both were off their lows but its another indication that oil traders have the tiger by the tail and the consensus the Saudis are seeking to build for an extension to the production deal looks like it might be needed if prices are to rise to the levels the cartel is looking for.
  • Gold is little changed this morning at $1293 after hitting resistance around $1297 overnight. That level represents the 38.2% retracement of gold’s fall to recent lows meaning the easy reversal of the sell off has been made. Gold needs to break this level, and likely the 50% retracement at $1309 to turn the outlook sustainably.

Chart

  • Copper is higher again hitting the highest level in around a month as the round trip toward this years highs continues on what seems like renewed optimism about the state of Chinese demand. Overall prices rose between 0.6% on the LME and 0.93% in Shanghai with Comex copper splitting the two in what’s been a positive 24 hours for metals.

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