Originally published by AxiTrader
Key Takeaway
235,000. That’s the number of jobs the BLS reported that the US economy created last month with the release of February non-farm payrolls on Friday. It was a big enough number to confirm the Fed is almost certain to raise rates this week after the FOMC meeting. But strangely it was neither enough to give the US dollar a boost of drive bond rates higher.
Stocks loved it though with most of Europe, the Dow Jones Industrial Average, S&P 500 and Nasdaq 100 all finishing higher.
What ails the US dollar is an interesting topic. Could it be a long market? Yes. Could it be a lack of belief the Fed will really raise rates 3 times this year? Yes. But equally, at least in the case of the euro, a leak purporting to be of discussions at the ECB suggests Europe’s central bank may raise rates before it abandons QE. Whether true or not that fits the narrative I have been discussing on the improvement in the European outlook and that impacts policy divergence.
Broader US dollar weakness allowed many besieged currencies and commodities a release. The Australian dollar climbed back to 0.7555 at one point Friday, it’s at 0.7528 this morning. USD/JPY is back at 114.65 off Friday’s high around 115.50 and gold is back above $1200 at $1204 - $10 above Friday’s low.
It’s different for oil though. Further worries about the balance of supply and demand, more rigs being added in the US and the break of the trendline stretching back to the 2016 lows all conspired to see prices fall further. WTI ended the week at $48.49 while brent is at $51.37.
On bond markets rates remain elevated in the US, but the bond vigilantes couldn’t quite bring themselves to close the 10-year above 2.6% for the week. At 2.587% it’s not far off – but technically that is a world away as the range remains intact. We’ll see what the Fed’s actions, statement and dot plot have to say about that.
And the Fed is just one of the many show stoppers this week which include the expiration of the US debt ceiling agreement, the G20 meeting, the Dutch election, meetings from the Bank of England and the Bank of Japan the usual data flow and chancellor Merkel is meeting with president Trump in Washington while Treasury secretary Mnuchin is meeting with his German counterpart Wolfgang Schaeuble in Germany and at the G20.
A big week beckons
What You Need To Know (with a little more detail and a few charts)
- S&P 500 +8 (0.32%) 2872 (7.31 am Sydney)
- Dow Jones Industrial Average +48 (0.21%) 20902
- Nasdaq 100 +23 (0.39%) 5,861
- SPI 200 +3 (0.1%) 5,782
- AUD/USD 0.7538 -0.03%
- Gold $1204 0.31%
- WTI Oil $48.49 -2.35%
International
- US non-farm payrolls shot the lights with a booming increase of 235,000. That was well north of the 190.000 that forecasters were looking for and even stronger than the whisper number which had snuck up to around 210,000 after the big increase in ADP employment was released earlier in the week. Also out was the unemployment rate which fell to 4.7% and average hourly earnings which rose 0.2% for the month.
- The 235,000 increase came after an upwardly revised 238,000 for January as the US jobs market opened the year in strong form. That’s important because it almost guarantees the Fed is going to tighten rates at this week’s FOMC meeting. It’s also important for markets because it increases the odds that the Fed’s rhetoric is more aggressive than markets currently think. I say that because I sense that even though markets have repriced the risk of this month’s meeting over the past two weeks to expect a hike there is still room for the Fed to be more aggressive in its language – and dot plot – about the certainty it holds around another two rate hikes this year and the outlook for rates going forward.
- This is naturally important for bond markets in the US and across the globe. On Friday the two’s and ten’s managed to close with a little better bid tone. In the case of the 10’s that averted a close above 2.6% which would have been the first such close for two and a half years. Such a break would have signalled a big rise in bond rates to the rates bears.
- Speaking of bond bears, interest rates were up in Germany on Friday after Reuters reported that some ECB policy makers had discussed the notion of increasing rates across the EU even before it ends QE. Reuters specifically said the sources it spoke to said “the discussion was brief, and there was not broad support for the idea”. But German 10’s climbed 6 points to 0.48%
- But the genie is out of the bottle. This is something I have been talking about recently in my posts and especially on my daily video. I’ve highlighted that the euro can rally – especially against the yen because of the potential for policy – and bond rate – divergence across these big three global economies and that will have a large impact on their currencies. That’s especially the case for euro yen and other euro crosses as we saw late last week.
- On the political front Turkish president Recep Tayyip Erdogan does care who he upsets in his plan to get his referendum passed. With the Netherlands just a few days away from an important election it was inevitable that the government would wish to diffuse any far right aspirations to make a big deal of the Turkish pro-Erdogan rallies across the nation. But in turning back two Turkish ministers they’ve given the Turkish president a fulcrum to lever his aspirations against. But in accusing the Netherlands of Nazism he’s pushed pretty hard and ultimately there is likely to be some blowback from Europe. This could have implications for Turkey’s long-term relationship with the EU and on USD/TRY.
- One thing worth noting on the Dutch election this Wednesday is that because of the way the parties stack up and the way the voting system works far-right leader Geert Wilders is not expected to “win” the election. Such a move might be a market moving shock.
Australia
- Based on the fact that the SPI is up just 3 points on Friday night it looks like local traders reckon the S&P/ASX 200’s 34 point rally Friday pre-empted Friday night’s US move.
- But what will be getting the local bulls excited is that at 5782 the SPI is back up at the top of the SPI range for the year and is a chance to break out if it can get through and close above 5789. How that can be so when the physical market is still around 55/60 points below the high of the year has as much to do with the time compression before the looming roll away from the current March futures contract which is the main trade item for non-CFD SPI traders as anything else.
- What’s important about that is a break would also breach the trendline that stretches back to the 2007 high. But it has to break first.
- Nothing exciting on the docket for Australia today. But I can’t wait to see the NAB business survey tomorrow, Westpac’s consumer sentiment survey Wednesday, and Australian employment Thursday.
Forex
- Why the US dollar fell after such a strong number is not an easily accessible notion. Against the euro it’s not that hard. Policy divergence matters and if the Fed isn’t going to run away from the ECB in the fashion that markets thought then that will – and did – give the euro a lift. But that notion of an ECB move is just a thought bubble even dismissed by those sources spreading the rumour according to the way Reuters wrote their story.
- So maybe there is more to this. Maybe it really is just a long US dollar market, short euro market that drove that move. It certainly could be. That would also help explain why EUR/JPY broke higher. That’s something I was talking about last week on my videos. EUR/JPY was a neat way to reflect a non-US dollar currency view about policy divergence. I’ll do a separate piece later this morning – at the moment EUR/JPY is at 122.50.
- Elsewhere the pin bar on USD/JPY might embolden the yen bulls for a day or two. But I expect a fairly hawkish hike this week as opposed to the almost apologetic hikes we saw from the Fed in 2015 and 2016. Recall that Janet Yellen specifically said that 2017 is not either of these two years a couple of Friday’s back when she spoke. As the US moves toward full employment – if it’s not there now – and even if president Trump’s stimulus seems queued behind the repeal of Obama care the Fed seems to have coalesced around a view that it is for the economy to deny it the opportunity to normalise rates not the other way around.
- This will ultimately be very important for the US dollar and its rally. Wednesday’s FOMC decision is a huge event for forex traders.
- In the meantime sterling is trying to base and the Aussie has caught a lift.
- Here's the early morning Monday snapshot of where rates are right now (7.21am Sydney)
Commodities
- Oil has broken a significant uptrend line on Friday as the CERAweek discussions seem to have marked a bookend to the rally of the past 12 months. As an observer from afar it seems to me the takeaway message is that the balance of power in the oil market has clearly shifted and OPEC’s attempts to nuance the market price higher – Brent above $60 – but not too high isn’t going to work in the current environment where US shale oil is both competitive at current prices and increasing production.
- That is especially the case when compliance is high but essentially centred on the Saudis and a few gulf allies.
- $47.00/20 seems like the next support. But a run toward $45 can’t be ruled out looking at the WTI chart at the moment.
- Gold climbed back above $1200 after a test lower Friday once the US dollar started to struggle and reversed its initial strength.
- Copper pushed a little higher Friday reportedly as BHP talks to the striking workers and the build in LME inventories slowed. Other base metals also recovered a little into week’s end helping copper.
Today's key data and events (all times AEDT)
- Australia - Nil
- New Zealand - Food Price Index (MoM) (Feb) (8.45am)
- China - Nil
- Japan - Domestic Corporate Goods Price Index (MoM) (Feb), Domestic Corporate Goods Price Index (YoY) (Feb), Machinery Orders (YoY) (Jan), Machinery Orders (MoM) (Jan) (10.50am); Tertiary Industry Index (MoM) (Jan) (3.30pm)
- Germany - German Buba Monthly Report (10pm)
- EU - ECB President Draghi's Speech (12.30am)
- UK - Nil
- Canada - Nil
- US - Labor Market Conditions Index (Feb) (2am); 3-Month Bill Auction, 6-Month Bill Auction (3.30am)
Have a great day's trading.