FOMC Minutes Say A December Hike Is Locked And Loaded

Originally published by AxiTrader

Quick Recap

The release of the Fed minutes, which showed the move toward a rate hike in the US is closer, didn’t really change the overall tone of overnight moves when they were released at 5am this morning. Those overnight moves had already been dominated by US dollar strength against the Yen and Euro and a little bit of further weakness in bond rates with the 10 year US Treasury up at 1.78%.

Stocks in the US are mildly stronger after a weak lead from Europe which was playing a bit of catch up to the moves the previous night in the US markets.

OPEC was interesting overnight – oil is down again and the charts suggest some further weakness until an actual deal is inked.

What You Need To Know

Here’s what I picked up

International

• US stocks weren’t phased by the Fed minutes – the S&P 500 is up 0.1% at 2139 while the Nasdaq 100 is 0.15% lower and the Dow Jones Industrial Average is up 0.1%. This is nowhere near any type of full recovery from the previous night’s selling. In part that will reflect earnings season tension but also growing calls that valuations are stretched and technician papers saying the risk of a collapse is growing.

• Supporting this notion that even though the observed Vix volatility is low fear is high is the relative cost of buying downside option protection to a 5% move in stocks to a 5% move to the topside. Bloomberg reports this spread is at an all time high. Here’s the Bloomberg chart.

• The Fed minute s didn’t really change the big moves overnight as highlighted in my introduction. But it did show a somewhat divided Fed that is very close to a rate hike and is more likely than not to pull the trigger in December. Here are some key highlights:
  • Stan Fischer delivered, the minutes show “Among the participants who supported awaiting further evidence of continued progress toward the Committee’s objectives, several stated that the decision at this meeting was a close call”.
• • Differing views on employment markets “Some participants pointed to the slowing in payroll gains and modest pickup in wages this year and judged that the labour market had little or no remaining slack. Some others noted that still-muted wage growth, a level of involuntary part-time employment that remained elevated, and recent increases in labour force participation indicated that slack remained in resource utilization, or expressed the view that the longer-run normal rate of unemployment was uncertain and could be lower than current estimates”.
  • Labour market versus inflation divide “Some participants believed that it would be appropriate to raise the target range for the federal funds rate relatively soon if the labour market continued to improve and economic activity strengthened, while some others preferred to wait for more convincing evidence that inflation was moving toward the Committee’s 2 per cent objective”.

• Some chat last night about the ECB and the taper program with Reuters claiming an exclusive which says the bank “may discuss technical changes to its asset-buying scheme next week but a decision could be deferred until December when the bank will also decide whether to extend the scheme beyond March, sources familiar with the discussion said”.

Australia

• It was a pretty positive close by the end of trade yesterday with the S&P/ASX 200 only down 5 points to 5474. Given the low was 5433 that was a really good rebound and in no small part that was down to the rally in banks. ANZ Banking Group (AX:ANZ), Commonwealth Bank Of Australia. (AX:CBA), and Westpac Banking Corporation (AX:WBC) were all higher helping offset the fall in BHP Billiton Ltd (AX:BHP), Rio Tinto Ltd (AX:RIO), South32 Ltd (AX:S32) and Fortescue Metals Group Ltd (AX:FMG). Oil stocks were lower as crude prices reversed and it’s more likely than not that we see more of that today as crude is down another 1.34%.

• On the data front yesterday the Consumer confidence print of 102.4 was, like the NAB business conditions survey the day before, solid. Westpac thinks things are strong enough to say no rate cut in November which is something HSBC’s Paul Bloxham also said in a note yesterday on the looming rise in inflation as commodities, especially oil, continue to rebound.

• I have been saying for months now that a rebound in oil is good for the global economy because of the inflation increase which will in turn relieve pressure on central banks and increase inflation expectations. But Bloxham’s point is that in Australia we’ll also get second round impacts from increased national income as commodity prices continue to rise and as wages get a boost as well.

Forex

• The US dollar was much stronger overnight with the US Dollar Index marginally higher but the US gaining ground on the JPY/USD and EUR/USD again. The Yen in particular has had a big move losing 0.65% as USD/JPY has now broken up and through 104 and taken out resistence nicely. It reinforces the medium term view I have been talking about in my videos of a run toward 109, probably 112. Yesterday governor Kuroda said he could ease more if necessary but one of his colleagues – Takata suggested the hurdle for another cut is high. It certainly is this year and I think Kuroda is just trying to remain consistent.

• The break of the short term wedge in USDJPY suggests a move toward 106.50 could be on the cards. Many traders and forecasters have been caught looking the other way on USDJPY. You’ll recall there were almost universal calls for 95 when I was saying it is going higher. So there is some catch up and recalibration necessary in the market. That doesn’t seem to have occurred yet so USDJPY retains a topside bias toward the zone which includes the 38.2% retracement (107.85) of the big 2016 down move and the 200 day moving average 108.10 unless sticks go into a funk or risk goes off. Here’s the chart.

• For the Second night in a row Euro was lower even though EU data was stronger. German Wholesale prices printed -0.3% from -1.2% last and -0.9% expected in the year to September. Likewise EU industrial production printed 1.8% in the year to August from -0.5% last and against the 1.1% expectation. That Euro remains under pressure as the data improves tells you much about market sentiment towards the common currency – traders just want to accentuate the negative.

• Here’s the chart – we aren’t far from my initial target of the break which is around 1.0960.

• The GBP/USD rocketed higher in early Asia on chat that the parliament would get a vote on the strategy for article 50 trigger which implied a softer Brexit than the super hard one that Teresa May seemed to be pushing for. That saw the GBPUSD hit a high of 1.2325ish but it is back at 1.2215 this morning after it became clear that the British PM did not intend such a vote. She told parliament it would have plenty of time to discuss Brexit in the normal course of business. One thing worth noting – there are two sides to these discussions and Europe may impose a hard Brexit. Much water to flow under the bridge though. For the moment though the reaction yesterday suggests there is some tension about being caught short the pound. That may be a short term signal that a base is being built.

• Looking at the commodity bloc the Aussie, Kiwi, and CAD are all up a little overnight – helped by the pounds rally yesterday. The Aussie is at 0.7567, up 0.4% this morning.

Commodities

• Let the shenanigans begin. Bloomberg reported that Russia’s two biggest oil firms now say they can look at production cuts as Russian president Putin said he sees no obstacles to a global oil deal. But more interestingly OPEC production data showed the group increased production in September. What’s interesting about that though is the OPEC data says Iraq and Venezuela are producing less than they say they are which means they’ll be arguing about their share of production cuts because it’s in the interests of both nations – and others most likely – to have the highest starting point possible.

• It’s just one reason traders are leery until they see the ink of the deal as done. I’m in the camp that believes the fiscal imperatives will get the deal done. But for the moment the charts suggest a short in Crude Oil ($50.21 -1.14%) might be a good trade with a stop above the recent high. (Not advice this is an explanation of my systems setup). Initial target $48.40/50.

• Gold is becalmed, Copper is dancing on the spot.

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

• Australia - Consumer Inflation Expectation (Oct) (11am)
• New Zealand - Business NZ PMI (Sep) (9.30am); Food Price Index (MoM) (Sep) (9.45am)
• China - Imports (YoY) (Sep), Trade Balance CNY (Sep), Exports (YoY) (Sep), Trade Balance USD (Sep) (1.30pm)
• Japan - Bank lending (YoY) (Aug), Money Supply M2+CD (YoY) (Sep) (10.50am); Tertiary Industry Index (MoM) (Aug) (3.30pm)
• Germany - Wholesale Price Index (MoM) (Sep), Wholesale Price Index (YoY) (Sep) (n/a); Consumer Price Index (YoY) (Sep), Harmonised Index of Consumer Prices (YoY) (Sep), Consumer Price Index (MoM) (Sep), Harmonised Index of Consumer Prices (MoM) (Sep) (5pm)
• EU - EU Extraordinary Economic Summit (5pm)
• UK - RICS Housing Price Balance (Sep) (10.01am); CB Leading Economic Index (Sep) (12.30pm)
• Canada - New Housing Price Index (YoY) (Aug), New Housing Price Index (MoM) (Aug) (11.30pm)
• US - Initial Jobless Claims (Oct 7), Continuing Jobless Claims (Sep 30), Import Price Index (YoY) (Sep), Import Price Index (MoM) (Sep), Export Price Index (MoM) (Sep), Export Price Index (YoY) (Sep) (11.30pm); EIA Natural Gas Storage change (Oct 7) (1.30am); EIA Crude Oil Stocks change (Oct 7) (2am); FOMC Member Harker Speech (3.15am); 30-Year Bond Auction (4am); Monthly Budget Statement (Sep) (5am)

Have a great day's trading