Originally published by AxiTrader
Key Takeaway
Janet Yellen seemed to confirm that rates will be rising this month, and more than once this year. But stocks and US dollar traders were a little nonplussed with stocks ending higher and the US dollar failing to hold 102 in US dollar index terms. In the end the Dow Jones Industrial Average clung to 21000 – just.
For forex traders the question is whether that was just weekend position squaring or something more telling about the outlook for the US dollar. Either way it lifted a weight of the Australian dollar but it is still below 76 cents this morning. euro is just above 1.06, and the yen has dipped back under 114.
On other markets copper is back below $2.70 a pound, gold is hanging tough in the mid $1230’s – could it get a bid today – and WTI is back above $53.
Looking ahead for the week we get RBA and ECB decisions, US non-farm payrolls Friday, China inflation, Japanese current account and EU IP. It’s a big one.
What You Need To Know (with a little more detail and a few charts)
- S&P 500 +1 (0.05%) 2383 (7.28 am Sydney)
- Dow Jones Industrial Average +3 (0.01%) 21005
- Nasdaq 100 +9 (0.16%) 5,870
- SPI 200 +21 (0.4%) 5,728
- AUD/USD 0.7583 +0.2%
- Gold $1234 0%
- WTI Oil $53.33 +1.3%
International
Politics is back to the fore this morning
- He’s at it again, president Trump was tweeting madly over the weekend. As the Russian controversy continues to engulf his presidency president Trump went on an accusatory Tweetstorm saying the Obama administration had tapped his phones during his campaign.
- I raise this not because it has a direct impact on markets but because markets applauded the version of president Trump they saw address Congress. That means this version if he reverts to previous conduct is a risk. As is the Russian controversy. But it is worth noting that James Clapper, the director of national intelligence from 2010 until January 2017 besides saying that he was unaware of any wiretapping of president Trump’s campaign also seemed to give his campaign a pass on any Russia tie collusion allegations. “We did not include any evidence in our report — and I say, ‘our,’ that’s NSA, FBI and CIA, with my office, the Director of National Intelligence — that had anything, that had any reflection of collusion between members of the Trump campaign and the Russians,” Clapper said. “There was no evidence of that included in our report.”
- Again, this is not a political blog. But politics is important for markets…just ask French bond holders, or Sterling traders. So I think Clappers comments, are worth noting. They could end up being a de-esclatory intervention in the whole debate. That would help markets refocus on economics and the Fed.
- Speaking of politics, French this time. It seems senior members of Francois Fillon’s party are about to stage an intervention to have him replaced for the presidential election by former president Alain Juppe.
- Moving across to the Fed now and it’s clear that Janet Yellen has signalled that rates will rise more than once this year. Speaking on Friday in a speech titled “From adding accommodation to scaling it back” Yellen didn’t mince words when she said (my bolding) “Looking ahead, we continue to expect the evolution of the economy to warrant further gradual increases in the target range for the federal funds rate. However, given how close we are to meeting our statutory goals, and in the absence of new developments that might materially worsen the economic outlook, the process of scaling back accommodation likely will not be as slow as it was in 2015 and 2016.”
- That is Yellen is saying do not expect we will be one and done this year when it comes to interest rate hikes. So you could have been forgiven for thinking that markets might reacted to her comments. But they didn’t and in fact the US dollar weakened into the close of the week.
- Why? Perhaps because all she did was reinforce what the market had come to believe over the course of the week. Don’t forget the previous Friday the CME’s FedWatch tool had the chance of a March rate hike at around 25% but before Yellen spoke other Fed speeches had moved the needle to almost 80% where it ended the week. So the reaction had already happened.
- But I’m in the camp – like former Fed vice chair Alan Blinder – which still says the most likely outcome for US rates this year is a total of 3 or 4 hikes.
- In other big news Chinese president Xi has lowered the nation's growth outlook to 6.5% for the year ahead. That’s just a little lower than the 6.5-6.7% last year but is still quite an optimistic target given the headwinds the Chinese economy faces with housing and credit, not to mention the SOE’s.
- Indeed it is specifically these areas that China is trying to rein in. But this is the 5th year of the Xi presidency and as such it is important for his next 5 years, and his legacy beyond, that growth this year remains strong. So I expect the government to pull out all stops to try to hit 6.5% - as remarkable as that seems for an economy the size of China
- So in the end we start the week with plenty to talk about and think about and with no signs, other than the overhead resistance I’m still banking on, that the rally in the Dow (21005) or the S&P 500 (2383) is going to slow. What’s interesting is that bonds sold off last week – but not too much.
- So the question for me is whether I am reading to much into the impact – potential – of the Fed. Or whether the Ides of March might be a day when markets get a bit of a shock.
Australia
- The local market had a poor day Friday with the S&P/ASX 200 losing 0.81%, 47 points, to end the week on the back foot but only really down 10 points. So not terrible but not good either given the performance of US markets.
- SPI traders are betting on a better day today adding 21 points on Friday night.
- That leaves plenty of room for a catch up with the moves in US markets if traders are minded in that direction this week.
- On the data front we kick off the week with the MI Inflation monthly inflation gauge today. But I’ll be more interested in what the RBA has to say about the outlook for growth in the governors statement accompanying what is widely expected to be no interest rate increase tomorrow afternoon. That the Q$ GDP was better than expected is no argument. But where as the RBA says growth will get back to potential and stay there for the forecast period the chief economists of both Westpac and the NAB are worried that there is a big pothole coming for the Australian economy next year as housing slows and domestic consumption takes a bit of a dip.
- I’m with Bill and Alan 100%. Australian household debt will bite eventually. But it’s something I’ve been watching closely for the best part of a decade now and the debt pile has only gotten bigger. So it’s one of the risks to the Australian economy. Not a certainty.
Forex
- I’m still not convinced the “crowdedness” of the US dollar trade isn’t still working against it even though the relative central bank outlooks are working in its favour.
- Equally it is worth noting that the US economic surprise index has started to slip relative to Europe which might help explain why the euro is still above 1.06 this morning, the yen is back below 114, and the Australian dollar is only a little under 76 cents. So the end of the week failure below 102 in US Dollar Index terms could be instructive for the H&S pattern I’m still watching.
- In many ways the yen is at the centre of the US dollar debate right now and how that plays out is indicative of where the US dollar itself will head. But even the most casual observation of a USD/JPY chart shows it's trapped in a range. Certainly it's a wide enough range for traders to buy and sell in and perhaps it is a break of either side of this range which is the key to where the US dollar is heading in the medium term.
- On the Aussie though it too is becoming a crowded trade with net longs as reported to the CFTC by accounts characterised as large speculators hit their highest levels since April 2016 data released in the US on Friday showed. Yes that’s when the AUDUSD was trading up at 78 cents. So the Aussie has some deck clearing still to go
Commodities
- Gold is very interesting right now. It’s not exactly strong or weak. The US dollar swoon helped of course with the low of $1222 respecting the breakout/support zone in the $1219/20 region. That's a good sign but rising rates and a stronger - if not super strong - US dollar are weights on gold.
- Crude traders won’t give up…just when I thought it was time for a test lower prices rally. WTI finished at $53.33 and Brent closed the week at $55.90.
- Copper cant take a trick despite supply disruptions…its in a range but the market feels long. It closed at $2.69. It will be interesting to see what the impact of China's growth plans has on the copper price going forward.
Today's key data and events (all times AEDT)
- Australia - TD Securities Inflation (YoY) (Feb), TD Securities Inflation (MoM) (Feb) (11am); Retail Sales s.a. (MoM) (Jan) (11.30am); ANZ Job Advertisements (Jan) (11.30pm)
- New Zealand - Building Permits s.a. (MoM) (Jan) (8.45am)
- China - PBoC Interest Rate Decision (n/a)
- Japan - Nil
- Germany - Nil
- EU - Sentix Investor Confidence (Mar) (10.30pm)
- UK - Nil
- Canada - Nil
- US - Factory Orders (MoM) (Jan) (2am); 3-Month Bill Auction, 6-Month Bill Auction (3.30am)
Have a great day's trading.