Fed Hikes And Signals More To Come, But Traders Shrug

Originally published by AxiTrader

Market Summary

The Fed hiked rates by 25 basis points this morning and the US dollar weakened, bonds rallied and stocks rallied again.

Those moves are despite the fact the Fed upgraded it’s outlook for growth and unemployment and increased the projections for rates in the years ahead. Traders didn’t care though. Market pricing suggests they don’t believe the Fed’s outlook nor its rate projections.

Anyway with 20 minute before the close the Dow is up 115 points to 24,620, the S&P 500 has risen 0.12% to 2,667 and the Nasdaq is 0.32% higher at 6403. US rates are lower with the 10's at 2.35% and the 2's at 1.78% while the US dollar has lost 0.7% in Dollar Index terms.

And speaking of forex it’s a sea of US dollar red. The Aussie is up almost 1 per cent at 0.7630, the kiwi has gained 1.25% to 0.7019 and the pound has withstood a loss to the Tories in the Commons on a Brexit vote with GBPUSD up at 1.3407. Euro sits at 1.1817 and the yen has gained 0.9% with USDJPY at 112.53.

On commodity markets oil is lower despite another big draw in US inventories. WTI is down 0.81% to $56.68 while Brent lost 1.34%. Gold is higher on the US dollar weakness at $1252 and copper has climbed another per cent to $3.05.

The washup is SPI traders are excited and have added another 35 points overnight.

On the day today we have employment in Australia and then tonight we have ECB and BoE policy decisions as the highlights.

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

International (Special US edition)

• The Fed appears to have lack a certain credibility in the market. I say that because the reaction of bond, currency and stock markets continues to highlight that market participants still haven’t priced what the Fed suggests – through the dot plot – rates will be in the years ahead. Why that is the case is hard to fathom given the Fed has been truly transparent over the past few years about what they are doing and why they are doing it. Indeed the summary of the Fed’s forecasts are slightly stronger growth, slightly lower unemployment, and an expectation inflation is rising. Also Fed chair Yellen highlighted that additional rates rises could be required because of the fiscal stimulus that the tax cut will deliver. But in being transparent and holding a conversation with reporters – and thus the market – about the unexpectedly low inflation levels Yellen is – to a certain extent – undermining the fed’s own outlook. But why traders are ignoring the data and outlook is kind of intriguing.

• That implied question I’ve raised above is also one that Mohamed El-Erian raised in a tweet just after the Fed’s decision this morning. As he says, and I’ve highlighted above the Fed has delivered on what it said it would do and inflation is in fact heading in the direction the Fed thinks it is. Yet markets aren’t pricing what the Fed is telling us. It makes for an interesting 2018. If the Fed is right we could get one heck of a dislocation in markets when – if – we hit the tipping point where the market realises the Fed is on the right track.

Source: Twitter Screenshot

• Indeed when you look at the difference between the Fed’s dot plot and market pricing you can see the room for a reaction. This chart – via ING Economics – shows clearly the market either doesn’t believe the Fed or does not believe in the economy. ING, like me, think the market might have it wrong.

• Behaviourally I find this lack of faith in the US economy, and in the Fed’s moves interesting. Perhaps as an Australian I’m – we are – almost uniquely placed to speak about the pessimism that often pervades the economic debate even as the economy continues to do better than folks thought by outperforming expectations. Whether the US economy can do that in the next and subsequent years is obviously an open question. But I suggest the US economy is doing better than most folks give it credit. It’s as though they want to be pessimistic so they call the top, either in the economy or stocks. Anyway, I’ve gone off on a tangent.

• Back to the good stuff, and US core CPI undershot expectations overnight which gave strength to the arm of US dollar bears. The print of 0.1% was below the 0.2% expected but headline inflation rose 0.4% in November which took the yoy rate up to 2.2%. That lift tightens the relationship between PPI and CPI which I highlighted yesterday. Here’s the updated chart.

Source: TradingEconomics.com

Australia

• Westpac’s consumer sentiment index for December was a cracker. And it’s no understatement to say that it should go some way to assuaging the fears many of us hold with regard the outlooks for households and consumption – at least for the moment. Rising 3.6% in the month the index ticked up to 103.3 from Novembers 99.7. That means not only are there are more optimists than pessimists but the index is also at a 4-year high.

• Bill Evans, Westpac’s chief economist was almost ebullient saying “this is a surprisingly strong result and confirms the lift we have seen in the Index over the past three months. The average reading for the Index in the December quarter is 5% above the average for the September quarter when we saw a disturbing slump in consumer spending. This result is supportive of the view that consumer confidence may have bottomed out during that September quarter”. Almost!

• But just look at the chart. Let the good times roll?

Source: Westpac

• One very solid pointer to the outlook – especially given it’s jobs day today – was the rise in confidence consumers have in their employment situation. Westpac (AX:WBC) said the “Unemployment Expectations Index declined 2.4% to 127.6 in December, the index reaching its lowest level since May 2011 (recall that lower reads mean more consumers expect unemployment to fall in the year ahead).”

• That positivity from consumers has leaked into stocks here in Australia and the market has broken higher. The close on the ASX 200 last night at 6,021 wasn’t exactly spectacular but SPI traders have put on another 35 points overnight which has taken prices up and through the top of the range. It potentially puts 6,150 to 6,200 in the frame for the end of the year. At least technically on the break anyway.

Forex

• As I wrote earlier this week the US dollar just can’t take a trick. Traders are so uninterested in it that the vote in the UK on the floor of the Commons where this morning Theresa May lost and British MP’s will now get a vote on the Brexit deal has done nothing to dent sterling and indeed it is up 0.7% at 1.3410. It has underperformed the kiwi which is the best performer of the big traded currencies with a 1.24% gain to 0.7018 (not a typo) in what has been a really poor night’s trade for the big dollar. The Aussie too is higher but trailing the Kiwi with a 0.95% gain and move to 0.7629. Euro is 0.66% higher at 1.1818 and the yen has gained 0.85% with USD/JPY sitting at 112.55. The washup is the US dollar has lost 0.67% in US Dollar Index terms and is languishing back at 93.475.

• Like oil, see below, the price action in the US dollar is very instructive behaviourally. I don’t want to belabour the point but where prices go in the face of fundamental drivers gives us all an insight into the psyche of traders and where their bias are at the moment. And, as I continue to write even though stock traders are taking prices higher the lack of conviction of US bond (10’s at 2.35%, 2’s back at 1.78% ) and forex traders is interesting. My sense is that will be remedied in 2018. But for now the US dollar is on the back foot once again.

• We had a warning of the overnight move in the price action of the yen over the previous two days. As I highlighted yesterday USD/JPY was still in an uptrend but there was room for a pullback. We saw that overnight. Best respect the line while its here but overall USD/JPY looks biased back toward 110.80/90.

• Likewise the kiwi has roared in the past few days. From the low 68 cent region NZDUSD has moved up to sit at 0.7019 this morning. 0.7077 is the 38.2% retracement of the recent fall and a reasonable target.

Commodities

• How do you know if its no longer a bull market? When you get two bigger than expected prints for inventories draws but prices still fall. That’s where we are this morning as WTI and Brent continue to fall even though yesterday’s API inventory data showed a draw of 7.8 million barrels and overnight the eIA stocks data showed a fall of 5.1 million barrels. Booth are big numbers, both were bigger than expected draws and both WTI and Brent are lower. That suggests a lot of, perhaps all, the current news about tightness in the oil market is already priced.

• So this morning we have WTI down 0.6% at $56.80 and Brent at $62.59 down $1.2%. You can see the last couple of days reversal in the WTI chart below. My current target is for a test of the uptrend channel bottom which comes in at $55.75. If that was to break then prices could head toward the 38.2% retracement level of the recent upmove in the mid $53 region.

• Gold is higher this morning with the weakness in the US dollar – can it ever take a trick – and is currently trading at $1,252 this morning after a gain of 0.7%. Copper too has done better with a 1% gain to $3.03 ($3.05 in MT4 terms) which takes it back into the resistance zone here and to $3.05. Should prices move up and through $3.05 it could run. But it has to break first.

Have a great day's trading.