Powell Scares Stocks

Originally published by AxiTrader

Market Summary (7.30 am)

Each of the major markets – bonds, foreign exchange, and stocks – heard a nuanced message as Jerome Powell appears to have reinforced the subtle tilt of the Fed to a more hawkish stance under his leadership in his testimony to lawmakers on Capitol Hill overnight.

I say that because he was upbeat on the economy, said the US was nearing full employment, said he believes the economy has picked up since December and highlighted the Fed wanted to avoid an overheating economy. He tempered that message by saying the inflation target was important and he demurred in favour of his colleagues decision at the next FOMC meeting when asked to pre-empt the dot-plot of how many rate hikes the Fed will undertake in the year ahead.

That’s caused bonds and the US dollar to increase while stocks are lower. Crucially though folks, my sense is the market is still not pricing enough rate hikes into the interest rate futures or curve.

The wash up is that US bonds are a little higher with the 10-year Treasury at 2.90%, the 2's are at 2.27% and the curve is 63 points. Upward pressure on US rates also pushed rates higher in Europe.

Stocks are a little lower with the Dow is off 0.64%, the S&P 500 around 0.88 while the Nasdaq 100 is down 0.97%. We have a a little less than 30 minutes to go in trade for the day. Anything could happen in this market and the weakness has been intensifying in the past hour and a half.

As a result here at home SPI traders have subtracted 25 points after yesterday’s slightly tepid 15 point rally on the ASX 200 which closed at 6,056. Valuation effects as we near 6,100 on the physical?

Back to forex now and the low of the euro was 1.2222 which was more than 100 points off yesterday’s high. It’s back at 1.2235 0.65% lower since 9am Sydney yesterday when the forex clock turns over for a new day’s trade. USD/JPY is interesting. Up on the US dollar strength but the yen found a bid as stocks slipped. It’s at 107.36 now. Sterling is down about 0.35% to 1.3917.

On the commodity bloc it’s a double whammy of negativity for the Aussie, kiwi, and Canadian dollar as US dollar strength hits commodities which feeds back into the prices of all three currencies. The kiwi is the big loser off 0.85% to 0.7239. The Aussie is down 0.73% at 0.7797 after it again found support in the low 0.7790’s overnight. A break could be at hand with 0.7750 in the frame. USD/CAD is 0.4% higher at 1.2743.

Oil is lower as the US dollar rally and a refocus by the IEA on the production pathway of US shale combined to see the bulls lose their strength. WTI is off 1.2% and Brent has fallen 1.1%. Gold is down also having lost around $15 an ounce, 1.15%, to sit at $1317. Copper, like much of the metals space overnight, is lower too having lost 1.25% to $3.1575 a pound.

Here at home today we get HIA new home sales and RBA private sector credit. But most eyes will be on China and the release of the NBS manufacturing and services PMI’s. In Germany tonight we get the release of the Gfk consumer confidence data as well as the unemployment data. US GDP though is the highlight when Q4’s data is released at 12.30am my time.

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

International

• Jerome Powell’s testimony and conversation with lawmakers was interesting insofar as how upbeat he was on the outlook for US growth. He said that his “personal outlook for the economy has strengthened since December”. He also said “we’ve seen continuing strength in the labor market. We’ve seen some data that will in my case add some confidence to my view that inflation is moving up to target. We’ve also seen continued strength around the globe, and we’ve seen fiscal policy become more stimulative”. If that doesn’t sound like 4 hikes this year I don’t know what does.

• istakes made by the Greenspan lead Fed which left rates too low for too long earlier this century. Arguably that helped build up the excesses which lead to the GFC and collapse ini stocks during that 2007/8/9 period. On that note Powell said the fed will seek to strike a balance between avoiding an overheated economy and getting inflation back to 2% on a sustained basis. Importantly for my view articulated that the market still has priced enough rate hikes yet was his comment that “some of the headwinds the US economy faced in previous years have turned into tailwinds”. The handbrake has been released.
  

• On this avoid the Greenspan redux theme of mine Powell also said, “This is a time when we need to be alert to build up of either financial imbalances or to inflation building up. We don't really see those right now”. Indeed he stressed there is no issue now saying, “If you look at the financial stability situation broadly, we do see some high asset prices. What we don't see is the buildup of leverage among households. We see the banking system and the financial system generally being fairly resilient. I think the financial stability picture shows at most modest risks”. But the Fed chief is on the look out. It almost guarantees the continuation of this gradual path in 2018 and into 2019 unless of until the data starts to print poorly on a sustained basis.

• On the recent marginal tightening of financial conditions – against long run averages – and recent volatility in stocks Powell said, “we do not see these developments as weighing heavily on the outlook for economic activity, the labor market and inflation”. Rather he said,” the robust job market should continue to support growth in household incomes and consumer spending, solid economic growth among our trading partners should lead to further gains in U.S. exports, and upbeat business sentiment and strong sales growth will likely continue to boost business investment”. The Spinnaker is up folks. The spinnaker is up.

• So we have US 10’s back at 2.91/92% and the US dollar bid once more. Never mind that the Atlanta Fed has dropped its first quarter guesstimate on its GDPNow indicator to 2.6% overnight from 3.2% on Feb 16. That’s less important at the moment than the fact that Powell sounds hawkish. So the question I’m asking myself, one likely resolved with GDP and non-farms this week. Is whether 10’s are going to break to and through the 2.95/3.00% region. The fact that the 10’s bounced off my little trendline the night before last gives me pause – that is for sure. This region needs to hold or the US bond market selloff could intensify and take stocks (and the US dollar) with it.

• Inflation data in Germany last night was a little weaker than expected. The harmonised rate for the month of February (preliminary data) was 0.5% against 0.6% expectations after last month’s 1% fall. That saw the year on year rate drop from 1.4% to 1.2% against expectations of a print of 1.3%. You can see why Mario Draghi remains cautious on his inflation outlook and monetary policy. But on that front Bundesbank chief, and campaigner for the ECB presidency after Draghi, Jens Weidmann said “If the upswing continues and prices rise accordingly, in my view, there is no reason why the Governing Council should not end the net purchases of securities this year”. Certainly QE should end but he sounds a little bullish on inflation given last nights numbers. But he did stress, “One thing seems clear to me: monetary normalisation in the euro area will take a long time. Monetary policy will remain very expansive even after the end of net bond purchases.” Indeed it will.

• Martin Wolf in the FT today on China is a must read. He argues that the return of the strong man autocratic rule in China is a game changer when it comes to how the west’s more open economies and political structures think of and interact with China. It’s system of rule, now that any semblance of a hint of a path toward democracy is dying, must be seen as a competitor. That has implications for Chinese inbound investment – how it is evaluated and regulated. He’s got right to the nub of it. This is my must read of the year so far. History has a long arc and a big sweep. What we are witnessing in China right now is a big shift. It is – or should be – a game changer.

Australia

• A mildly disappointing day on the S&P/ASX 200 yesterday with just a 15 point gain by the close of play. Could it be that as we head toward 6,100 – the top(ish) of the recent range – that questions of valuation are starting to be asked by traders? Or could it just be general circumspection in the run up to last night’s very important address from the Fed Chair?

• I’m not sure. And for today at least the point is moot because the fall in US stocks – which has accelerated since I started writing this note a little over an hour ago – is weighing on the SPI which has now more than doubled its loss since I sat down and has now knocked 25 points off yesterday afternoons close. We’ll see where the US markets close at the end of play.

• But looking at the price action yesterday I was already a little worried that I’d been too ebullient in my expectations this time yesterday. I say that with reference to the price action I saw on the market during the day. But the reality is that even with last week’s resilience in the face of offshore weakness the global macro backdrop is still key. So the question now is what we see in jobs and wages data Friday from non-farms and where that leads US 10’s and by extension US and global stock markets. What Fun.

• On the day though the 4 hour chart suggests 5,993 is the key level to watch on the SPI. It’s the trendline from the rally. Naturally, as usual, I respect trendlines unless or until they break. But if 93 breaks that would also take out the low of the candle before the current one on the dailies which would be ugly technically.

Forex

• The US dollar is trying to break higher. Not through 91 yet but certainly through the little trendline I shared earlier this week. At 90.35 the US Dollar Index is just below the recent high around 90.55. It would need to best that to give me encouragement – think 1.2200 in EUR/USD – that a move is afoot. A break of 91 would suggest it can run toward 91.71.

• The corollary of this move is that the euro has broken down and into the previous uptrend channel which became support recently. But it has managed to again stay above the 1.2200 level which provided support a couple of week’s back. For me it remains the case that a break of this is the key to the Kingdom. And a run to 1.2020ish.

• USD/JPY is in many ways the most intriguing currency out there at the moment – at least for me. On the one hand you have US dollar strength pushing it higher and on the other hand you have equity market weakness biasing it lower. Naturally that means the yen should outperform the euro, pound, Aussie and almost any other currency in the current environment. 131.16 is the 200 day moving average and 130.92 is the recent low. A break of both of these could see a cascade lower in EURJPY toward 128.99.

Commodities

• The IEA continues to ramp up the rhetoric about the path for US shale oil production and in doing so ratchet up the pressure on OPEC and its partners to hold firm. Of course with Brent in the high $60’s a barrel and WTI around $63 OPEC would be far from disappointed with the fruits of its production cutting labours.

• But the fact that IEA Executive Director Fatih Birol said the US will become the world’s biggest oil producer ”definitely next year” if not this year reinforces the need for the Saudi’s recent moves to extent OPEC to a broader cartel including Russia over the longer term to manage oil prices as a necessary requirement to stop prices falling. Clearly if the Saudis or Russians released the spigot they’d be the bigger producers. But that’s the point of the production caps – supply management to drive prices higher. The emergence of US production, its profitability levels, and the continued growth are a fly in the ointment. Birol also highlighted that “Canada, especially the oil sands, and Brazilian offshore projects” were also key non-US sources of growth.

• Gold has broken lower, something I highlighted yesterday in my charticle on the $1325 level. Like the yen, gold is subject to competing forces given it is assailed by the stronger US dollar – hence why it is at $1317 this morning. But equally supported by stock selling and an improved inflation/growth outlook. The charts suggest the recent lows around $1306 can be approached. If broken $1285 is the next target. But in the current environment gold is likely to find some support initially.

Have a great day's trading.