Fed Minutes Says The Time Is Nigh For A Rate Hike

Originally published by AxiTrader

Key Takeaway

Stocks in the US as measured by the S&P 500 are a little weaker this morning even though the Dow made a new intra-day record high and is clinging in the black. But bonds are also a little lower even though the Fed minutes said the time for a rate rise is coming soon. It feels like the market has focussed on the risks the Fed highlighted rather than the message that rates will be rising soon if the economy stays on track. As it has since this meeting.

That dovish interpretation saw the US dollar lose significant ground almost the minute the minutes were released. It’s helped euro climb nicely from a low below 1.05 last night and the Aussie has regained 77 cents once more.

On commodity markets gold is at $1237, oil is down in what's become usual post roll volatility, while copper and base metals are a little lower as was iron ore.

On the political front the forces of the centre are aligning against Marine Le Pen in France while US Treasury Secretary Steve Mnuchin has entreated the IMF to police currency policy. That’s interesting.

What You Need To Know (in a little more detail and with some charts)

• S&P 500 -2 (0.1%) 2363 (7.47 am Sydney)
• Dow Jones Industrial Average +28(0.1%) 20,772
• Nasdaq 100 -6 (0.1%) 5,859
• SPI 200 -7 (0.1%) 5,763
• AUDUSD 0.7710 +0.46%
• Gold $1238 +0.2%
• WTI OIl$53.53 -1.44%

International

• The Fed minutes are interesting. If like me, you think the Fed is priming the market for a move and March is actually live, then you probably grabbed the words that said “many” thought a hike would be appropriate fairly soon. But it seems that forex traders, in particular, have grabbed the bit that said the Fed still had time to react to an emergence of inflation and the discussion about the risks around the economic outlook.

• That these minutes would read dovishly was always a risk after the statement that was delivered last meeting. It seemed inconsistent with what Fed Speakers had been saying befor the FOMC meeting and it is inconsistent with what the majority of speakers have been saying since. So this is not a banner day for central bank transparency on the face of it. What the market reaction means is that the Fed still has some work to do if it is to get it’s message that rates could rise soon is truly the intention of members of the FOMC. Naturally I think for many the decision happens when they actually sit at the table and hear the discussion fro the 12 districts, the governors, and staff.

• So to this end, I expect March to end up be a signalling meeting rather than an action meeting. A signal that May or June are on the table for a rate hike.

• That's especially the case because the market doesn't expect a hike. SO if they want to hike without a shock the Fed speakers circuit will need to ramp up the rhetoric in the next couple of weeks before the pre-meeting blackout.But if they do then it will move toward a 60/70% probability by my guess.

• On the data front in the US last night US home sales hit a fresh 10-year high and prices rose 7.7% year on year. Both those metrics suggest, along with the jobs numbers, and other data in the US that the economy is heading in the direction the Fed expects. And thus support the tightening the Fed has signalled.

• On that front Fed Governor Jerome Powell asked if March was live for a rate hike said "yes". He then added that as long as the economy moves along its current path "it will be appropriate to gradually raise interest rates, including fairly soon."

• Marine Le Pen’s chances of winning the French presidency appear to have slipped a little. That’s because of the both the ongoing probe into the employment of her bodyguard as a staffer but more importantly because traditional political forces are already coalescing against her. Last night centrist candidate Francois Bayrou – who gained 9% of the vote in the 2012 election – withdrew from the race throwing his weight behind Emmanuel Macron. Bayrou said “We are in an extremely risky situation, and to tackle this exceptional situation, I think we need an exceptional response. I have decided to offer Emmanuel Macron an alliance. The danger is too big we must change things”.

• French bonds, and their spread to German 10’s, rallied as a result of the news as traders bet political uncertainty in France was reduced a little.

• UK Q4 GDP growth was increased to a quarterly rate of 0.7% when released overnight. That’s up 0.1% from the original estimate of 0.6%. But Britain’s Office for National Statistics downgraded overall growth for the year from 2% to 1.8%. Markets focussed on this downgrade, and the 1% fall in investment during Q4 as signs of weakness in the economy.

• Mexico looks like its spoiling for a fight. Last night another government official said Mexico won’t accept unilateral immigration moves by the US.

• The WTO is trumpeting a global deal to cut red tape which they say will raise global growth by 0.5% by 2030.

• While the battle over the latest Greek bailout continues the EU has opened another front telling Italy that it needs to reduce its fiscal gap or it will cop a fine. I bet the Italians would love to be able to do that.

Australia

• A really interesting day yesterday with earnings results and the Commonwealth bank trading ex-dividend ad a level of complexity to the overall index as individual stocks moved in different direction. At a macro level the overall performance of the ASX 200 to close up 14 points, +0.24%, at 5805 wasn’t terrible. But the lack of ability to push sharply higher after the record lead from the US the previous night looks like a sign much good news is already baked into the cake for the ASX 200.

• Indeed if you look at the price action of some of the miners who have been reporting massive recoveries in profitability yet have seen prices pull back. That suggests that even with commodity prices elevated all the good news has already been factored in by traders.

• That’s an important lesson for traders who read my morning note. I’m a behavioural finance and economics guy. That can mean many different things, but in this context I’m essentially looking at how prices (traders) react to news and events as a way to judge where there thinking, and positions are at. As I write often it’s like JM Keynes famous beauty parade analogy for markets – its not about the attractiveness of a bond, currency, index, or stock. It’s about what others think the most attractive – or simply the attractiveness – might be.

• So when you see stocks and the index struggle even when there is positive news it’s a sign much is already priced in. Likewise, as I note below the fact that GBP traders wanted to deconstruct the UK GDP data and focus on the negatives tells you much about their thinking.

• Anyway, back to the ASX today and futures traders are a little more circumspect with the dip in US markets presently and have marked the March contract down 10 points to 5760.
• Looking at a chart of the physical ASX you can see the proximity of last week's high to the top of this broad uptrend channel the local market is in. It reinforces the levels I highlighted yesterday of recent highs traders are watching closely.

Forex

• Possibly the biggest story in forex recently were reports yesterday that US Treasury Secretary Mnuchin told IMF boss Christine Lagarde that the organisation should actively police exchange rate policies. Does this mean that China or other nations are going to be pinged by the US Treasury as currency manipulators? It’s too early to tell. But reports out of the US is that there is a growing chorus of lawmakers who believe it is – including influential senators.

• But possibly what the Mnuchin story does tell us is that the US administration continues to want a lower dollar as a tool of trade. We’ll leave aside the cognitive dissonance on what this desire itself says about currency manipulation and focus on the US dollar as a tool of trade. Just something to keep in mind with a very long US dollar market right now.

• The Australian dollar broke a little hourly downtrend in afternoon trade yesterday (I saw it on my 4-hour charts and scaled down). As a result it popped higher running to a high of 0.7709 before running into fresh selling which has knocked it back a little to sit at 0.7683 before the release of the Fed minutes. But after what looked like another failure above 77 cents the markets read on the Fed has propelled it back to 0.7704 at the moment. Today’s release of Australian CapEx data for Q4 to super-importance for short AUDUSD direction. Forecasters are looking for a fall of 1% from the previous quarter's 4% dip for Q4. But traders will also be watching the forecasts for CapEx spending this year to see if the RBA is right and the hole is being filled and business is investing once again.

• Elsewhere in forex land the pound is lower as traders deconstructed the UK GDP data and determined it was both weak in actuality and sets up the prospect of more weak data across the course of 2017. But overall GBPUSD remains stuck in its recent very tight range at 1.2431 this morning – down 0.3%. It’s clear though that markets are still bearish sterling even if it has been stuck ion a range for a while now.

• The euro is still under pressure. At 1.0570 it has now recovered nicely off the overnight low of 1.0494. It had been languishing as largely unchanged before the release of the FOMC minutes at 6am this morning. USDJPY was largely unchanged before 6am but has now fallen half a percent to 113.05 while USDCHF is up 0.2% to 1.0092.

Commodities

• If you read this note regularly you won’t be surprised about I’m about to write next about Crude oil prices. After what seems to be the usual rollover day/s move oil prices slipped back again overnight with Nymex crude down 1.36% to $53.59 and Brent crude off a similar amount to $55.89.

• After the second contract (the one we are trading at AxiTrader) touch near the top of the range at $55 the previous night this move puts oil prices firmly back in the middle of the recent range. It’s still clear in open interest and net longs that traders are still betting that OPEC will eventually be able to drive prices higher. But it is interesting to note that a growing number of reports and articles questioning the timing of the draw in inventories, and thus balance in markets, OPEC will be able to achieve.

• As I’ve written often recently this is a $5 range for oil at the moment and only a break either side is likely to get traders excited.

• Gold is largely unchanged at $1236 this morning. I wrote a piece on gold yesterday morning which looked at the parameters of Golds range and the chances of a breakout. It needs a catalyst to break of course but it could be a decent run if that happens.

• Copper is down a little again today in sympathy it seems with other base metals and the fall in iron ore. That dip is despite BHP Billiton Ltd (AX:BHP) saying it won’t hire new workers until 30 days after the start of the strike at Escondida rather than the 2 weeks it is allowed to wait and which comes up this week. Elsewhere in supply news the Freeport McMoran and Anglo American (LON:AAL) mines are still facing regulatory hurdles. So copper waits. But the price action is intriguing.

Today's key data and events (all times AEDT)

• Australia - Private Capital Expenditure (Q4) (12.30pm)
• New Zealand - Nil
• China - Nil
• Japan - Foreign investment in Japan stocks (Feb 17), Foreign bond investment (Feb 17) (10.50am)
• Germany - Gross Domestic Product s.a (QoQ) (Q4), Gross Domestic Product w.d.a (YoY) (Q4), Gross Domestic Product n.s.a (YoY) (Q4) (6pm)
• EU - Nil
• UK - Gross Domestic Product (QoQ) (Q4), Gross Domestic Product (YoY) (Q4), Total Business Investment (YoY) (Q4), Total Business Investment (QoQ) (Q4) (8.30pm)
• Canada - Nil
• US - API Weekly Crude Oil Stock (8.30am); Continuing Jobless Claims (Feb 10), Initial Jobless Claims (Feb 17) (12.30am); Housing Price Index (MoM) (Dec) (1am); EIA Natural Gas Storage change (Feb 17) (2.30am); EIA Crude Oil Stocks change (Feb 17) (3am); 7-Year Note Auction (5am)

Have a great day's trading.