Originally published by AxiTrader
Market Summary
More records for US stock markets, green on all the major European bourses, and the US dollar getting hammered once more were the story of the night on Friday.
While stock traders were busily buying driving the S&P 500 up 0.67% to 2,786, while the Dow zipped 0.89% higher, and while the Nasdaq 100 rose 0.75%, the US dollar got absolutely belted on Friday night despite the fact core inflation rose a sharpish 0.3% which lifted the year on year rate to 1.8%. Sure headline YoY inflation stayed at 2.1% inflation but retail sales were up 0.4% for December.
But the market is the market and the US dollar index hit a 3 month low. That weakness also belied Bundesbank President Jens Weismann signally clearly that while he’d like QE to end soon there is no chance ECB rates will be rising in a hurry. Everyone hates the US dollar.
So this morning the euro is up around 150 points from Friday afternoon at 1.2200, the pound is close to 200 points at 1.3737, the yen, having made its move earlier in the week is still strong, but moved less, and sits at 111.04 this morning. The Aussie is just above 79 cents at 0.7903 while the New Zealand dollar – also having moved earlier in the week – dipped a little to 0.7246.
On bond markets, having sold off earlier Jens Weidmann’s comments saw German 10's rally while US 10's are at 2.55% an the 2-10 curve is at 54.
On commodity markets comments from the Russians appeared to support the current production cuts which in turn supported process Brent gaining 0.9% to $69.87 while WTI was up 0.8% to $64.30. Gold roared and is up close to $10 at $1338. Copper missed out and sits at $3.22.
On the day today we have the release of the MI monthly inflation gauge for Australia along with Korean Trade data. Otherwise it is pretty quiet. It’s also Martin Luther King Holiday in the US
Here's What I Picked Up (with a little more detail and a few charts)
International
- As highlighted above the US data was pretty good Friday night. Headline CPI was lower than expected at 0.1%, but core printed 0.3% once food and energy were stripped out. The US dollar bears focussed on the headline but that’s slightly disingenuous when the focus has been on the core as the Fed’s preferred measure. Anyway. It is what it is. And what it is, is a strong US economy. Retail sales for December printed +0.4% (with previous months revised higher) and business inventories were 0.4% higher. So overall the economy looks to have ended 2017 stronger and the data releases, that’s seen March rate hike probability increase to 88% and prompted the Atlanta Fed’s GDPNow model to upgrade expectations for Q4 growth when it is released to 3.3% from 2.8%.
- And on growth retiring NY Fed President Bill Dudley said last week that the recent US tax cuts could cause the US economy to overheat and lead to the Fed hiking at a faster pace than currently anticipated. But he gave a negative slant to this discussion by highlighting it could mean the “Federal Reserve may have to press harder on the brakes at some point over the next few years”. That in turn could mean “the risk of a hard landing will increase. Historically, the Federal Reserve has found it difficult to achieve a soft landing, especially when the unemployment rate has fallen below the rate consistent with stable inflation”. Hence the focus on the yield curve and the negativity about the US dollar I think. Folks are already looking toward a recession which could be years away. If you’ve followed Australia and Australian growth you might get a sense of how the hand wringers might turn out.
- On the other side of the coin Minneapolis Fed President Neel Kashkari tweeted in response to a WSJ story saying the inflation data should give the Fed comfort to continue to raise rates that he wasn’t convinced and “need to see more data”.
- As highlighted Jens Weidmann might be considered a hawk but he might actually be a dove-hawk. I say that because on Friday he warned that rates in the EU won’t raise too far or too fast in the EU. Weidmann said “It would be particularly stressful for the banks if the long period of low interest rates were to be ended by a rapid, sharp increase in interest rates,” adding (my emphasis) “as far as central bank rates in the euro area are concerned, however, the immediate risk of change is currently low.”
- And while we are talking about interest rates it’s worth noting that Reuters reports Japanese retailers are struggling to raise prices. Indeed it seems some of them are actively still cutting prices amid strong competition. This one is worth a read and highlights that the BoJ may change policy but it won’t be raising rates any time soon at the front of the curve even if it lets 10’s increase.
- IG Metall is still chasing higher wages in Germany with Audi and BMW workers on strike and more to come it seems.
- Some housekeeping at S&P and MSCI which are changing the industry classifications expanding and renaming the telecommunications service sector to the Communications Services and adding Facebook (NASDAQ:FB), Netflix (NASDAQ:NFLX) and Alphabet (NASDAQ:GOOGL) to this new sector and taking them from their current GIC.
Australia
- It’s a big week for local markets on the economic front this week with the release of the monthly inflation this morning, motor vehicles tomorrow, home loans Wednesday and then Westpac Consumer sentiment and unemployment on Thursday. All of these data releases are germane to the discussion about where the economy is, where households are, and what the prospects are for domestic spending and consumption. They could all help give a guide to a growing chorus which suggests that the RBA will be moving rate higher in 2018.
- That’s important because Australian – and Chinese – data has improved sharply recently as measured by the Citibank economic surprise index. From a low around -47.4 in December the Aussie CESI is at +24.8. That turn in the data, unsurprisingly coincided with the turn in the Aussie dollar. Throw in the fact that the Metals and Mining shares ratio to the overall MSCI global index is at its highest since 2015 and you can see why the Aussie dollar caught a bid. And why this week’s data is so significant for the outlook.
- Friday saw the ASX finish 2.4 points higher at 6070 to end what can only be characterised as a disappointing week for the local bourse given everything that has happened overseas and the overall ebullience of global markets at the moment. SPI traders are more positive for today however having added 31 points on Friday night. That means the outlook articulated on Friday for the SPI – and by extension the ASX – that the move above 6,042 (its at 6,049) opens 6,056 and then 6,069 as the 50% and 61.8% retracement levels of the latest sell off. A break of 6,069 would suggest a full round trip to 6113.
Forex
- As highlighted above the US was belted on Friday night despite a heap of positive US dollar news and the Atlanta Fed increasing their GDPNow forecast for the fourth quarter of 2017 to 3.3% from 2.8% before Friday’s data. In US Dollar Index terms the head and shoulders target has now been achieved but that also means the US dollar is breaking down as well.
- Bundesbank President Weidmann’s comments hit their mark with bond traders and the German 10 year rallied 4 points to close at 0.504%. But with US dollar bears in such firm control news earlier that talks would soon begin on a grand coalition for Germany helped the euro shot through the 2017 high Friday. That saw it hit around 1.2218. It’s at 1.2198 this morning. The pound was also bid with news the Netherlands and Spain are apparently seeking a softer resolution of the Brexit talks. It’s at 1.3737 this morning - the highest level since the Brexit vote.
- The commodity bloc was also higher and the Aussie dollar is sitting above 79 cents, the kiwi is at 0.7246, and the Canadian dollar is also stronger buoyed by continued surge in oil prices and the prospect that the Bank of Canada will again raise rates this week. It’s at 1.2457 in USDCAD terms.
- The path of least resistance in forex markets for some months has been for US dollar weakness. That appears to remain the case for the moment. But isn’t it funny how the prospect of raising rates in Canada and end to QE in Europe and Japan helps their currencies but data supporting the Fed’s path and possibly more rate hikes does not. The trend is your friend as they say so fighting the move - as I started too last week - is a dangerous ploy. Equally dangerous however it seems to me medium term is to continue to ignore US economic strength, recent wages and bonuses from big employers like Walmart (NYSE:WMT) and Target, and warnings from New York Fed President Bill Dudley that the tax cuts will likely cause an acceleration in the pace of Fed rate rises.
- For the moment though the US dollar bears have it.
Commodities
- Oil was higher again as the chorus of support from OPEC and it allies for the continuation of the current production cuts continued. Friday is was the turn of Russian oil minister Novak who said the market still needs to rebalance. “We see that the market surplus is decreasing, but the market is not completely balanced yet.” Something to put in your memory bank though, for later this year, is that Vagit Alekperov, Lukoil Chief Executive, said Russia should look to exit if Crude prices remain above $70 a Bbl for more than six months. Brent closed the week near there at $69.78 which is also near the top of the current upchannel. WTI is at $64.30.
- Gold has broken higher and has $1354 as a target now while the US dollar is weak. Copper is still drifting which is very interesting given what else is happening in base metals and the ebullience about global growth right now. Anyway, here’s the gold chart.
Have a great day's trading.