Stocks And Commodities Soar As The US Dollar Falls

Originally published by AxiTrader

Key Takeaway

As expected the FOMC raised rates by 0.25% signalling 2 more hikes in 2017, and then 3 more in 2018.

In the wake of the decision US bonds rallied hard and the US dollar came under heavy selling pressure as traders noticed the dissent of one voting member – Neel Kashkari – and the fact the “dot plot” hadn't really changed from the December meeting. Equally the tone of Chair Yellen’s press conference was one of a firm commitment to measured moves which suggests no panic and no surprises from her or her FOMC colleagues.

It is the measured nature of the economic outlook, the dot plot, the FOMC statement, and chair Yellen’s press conference which appears to have caused the US dollar selling and bond buying. The Fed will be pleased I think. This is the just right goldilocks delivery of an interest rate increase which hasn’t spooked the markets and has actually seen the US dollar lose ground.

So the Aussie is back above 77 cents, euro is atop 1.07 on the Fed and Dutch election exit polls, USD/JPY is running toward 113, and sterling – yes sterling, is closing in on 1.23. And, in US dollar index terms prices are back below 101. 235,000 jobs in February, a Fed hike and a weaker dollar. President Trump and Steve Mnuchin, not to mention trade representative Peter Navarro, will all be smiling.

So too will the bond bulls with US 10s back at 2.50% - 13 points below the high for this week.

Commodities have bounced on the weaker dollar oil is now up 2.12%, gold has popped 1.6%, and copper is 1.45% higher.

And of course I haven't even mentioned stocks. The S&P 500 is up 20 points, the Dow Jones Industrial Average almost made it back to 21,000 and the Nasdaq 100 tried to make a new record high.

It suggests a strong open in Australia this morning before we get the jobs data at 11.30am.

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

• S&P 500 +19.8 (0.84%) 2885 (8 am Sydney)
• Dow +113 (0.54%) 20950
• Nasdaq +43 (0.74%) 5,900
• SPI 200 +36 (0.6%) 5,818
• AUD/USD 0.7705 +2%
• Gold $1218 +1.7%
• WTI Oil $48.96 2.6%

International

• This is a central bank masterclass. The Fed has in the past few weeks materially changed market expectations, delivered on those expectations with a rate hike, but done so without disturbing the overall fabric of the market. It has been a pretty impressive manoeuver and Yellen and her colleagues should be lauded. Whether folks agree or disagree with the need to hike – I’m fully on board with raising rates – the key here is that the Fed has signalled to markets, and importantly US and global businesses, that it is in control and the economy is moving as expected. Things may change in the future if the economy accelerates or decelerates. But for now, job done.

• Anyway, the key for the market reaction was the very measured language and projections from the Fed. Janet Yellen stressed in her press conference that the Fed’s decision today was reflection of where the economy is now with reference to the Fed’s mandate. She highlighted that the FOMC was not making a judgement on what impact the Trumponomics stimulus might have on the economy. She said the Fed will have plenty of time to assess that once they see what the administration actually does.

• Looking at the statement the guys over at ForexLive have parsed the difference in language which helps highlight how balanced and gradual the Fed’s changes are.

• Through in a dot plot that looks consistent with Decembers one and there is nothing for traders to fear. But also nothing for the USD bulls.

• In other news overnight US CPI printed 2.7% year on year with the ex-food and energy print coming in at 2.2% after a 0.2% mom increase. Retail sales for the month of February were up 0.2% and NY empire manufacturing printed better than expected at 16.4 from 18.7 last month.

• Worth noting though – and one reason I think the Fed was keen to get this hike out of the way – is that the Atlanta Fed’s GDPNow estimate for Q1 has slipped below 1%. That’s seen a downgrade to 0.9% last night from 1.2% estimated on March 8. The Atlanta Fed said this was because “the model's latent dynamic factor used to forecast yet-to-be released GDP source data declined after the employment situation release from the U.S. Bureau of Labor Statistics (BLS). The forecast for first-quarter real consumer spending growth inched down from 1.6 percent to 1.5 percent after this morning's retail sales report from the U.S. Census Bureau and the Consumer Price Index release from the BLS.”

• G20 kicks off this week in Germany with the world’s top finance ministers and central bankers getting together to discuss the global economy. Recently there has been speculation that the communique in draft at present will walk away from the language around competitive devaluations and open trade. That notion is given some credence overnight with comments from the Bundesbank president Jens Weidmann who said “ Open markets and a competitive economic system are the pillars on which the prosperity of our economies rests. Free trade and competition result in a quantifiable increase in prosperity, particularly for those who have to consider their spending carefully.”

• I think the US is more likely than not to want the requirement to not pursue competitive devaluations will be left in given recent rhetoric from the new administration.

• And on the Dutch election it looks like Gert Wilders has not done as well as many feared he might based on the release of the official Ipsos exit polls. The Liberal party of the incumbent prime minister has polled better than expected. Now the process of forming government and cobbling together a coalition begins but - on the numbers - Wilders Freedom party won't figure in government.

Australia

• The S&P/ASX 200 recovered its footing to close up 15 points, 0.26%, at 5773. Key to the move was the continued rally in base metals and iron ore which lifted the miners and the overall basic materials sector of the index. Through in a little rally toward the close for the banks and financial sector and suddenly the big movers of the local index were on the March.

• With US stocks on the up this morning and the Fed being read as more benign than aggressive SPI traders have prices up 0.6%, 32 points. That means prices are up breaking recent highs again which suggests the local market is on the cusp of an important break. Looking at the chart of the physical index – rather than the SPI today – from my Reuters terminal its clear there is a little uptrend underway which was tested with yesterday’s low. SO the key level to watch in trade today is a break of 5785 – that could accelerate a run back to – perhaps above – 5800. We might even see a move toward the recent high at 5833.

• Looking at the Westpac consumer sentiment survey yesterday it’s clear that Australian households are still worried about the outlook. The headline index printed 99.7 for sentiment suggesting the pessimists still outweigh the optimists by a small margin. But looking under the hood of the report and the answers to individual questions it’s clear that consumers are worried about their finances.

• In particular family finances versus a year ago continues to collapse and at 78.5 is down 5.3% on February. That has to be a worry when it comes to consumer spending in the economy in the months ahead. Westpac chief economist Bill Evans said “this component is now at its lowest level since June 2014 when respondents were shaken by the May Budget announcement”. Recall that wasn’t a fun period for the economy.

• Indeed Evans said “There was a notable shift in March with the proportion nominating ‘pay down debt’ jumping from 20.5% in December to 25.7%, and the proportion favouring real estate dropping to just 11.6%, a record low since we first started asking this question back in 1974. The moves indicate a clear increase in risk aversion.”

• This is the big risk for the Australian economy in 2018. While the RBA says we’ll be growing at potential toward year’s end and then stay there. With low wages growth and a savings rate that has collapsed back to just a little more than 5% the ability and appetite of consumers to “do their bit” for growth is in question. It’s something I’ll be watching evolve closely in the months ahead.

Forex

• The US dollar is getting hammered in the wake of the FOMC decision. At 100.73 it is on the cusp of slipping below a little uptrend line and it might be time to roll out the head and shoulders potential again if it falls much further. 99.20/50 is the big level and that’s still over 1% away from current levels. But if US data starts to disappoint as the Atlanta Fed’s GDPNow suggests it might we could still see the US dollar under pressure for a while yet.

• Euro is up at 1.0725 busting through last week’s high. This break is important as it opens up significant topside. Especially because this is a US dollar move and as it stalls/pulls back the chances of more strength for euro and other currencies have risen. Likewise Sterling has made a solid base around 1.21 and is now just below 1.23. It has continually respected the old trendline around that level and looks like a move above 1.24 is a high probability.

• The yen is stronger as we wait for the BoJ meeting today. At 113.48 it’s back in the middle of the range after rejecting the topside probe recently. A move toward, below, 112 could be in train.

• Turning now to the commodity bloc and there has been a surge in the Aussie which is up more than 2% at 0.7705 after a high of 7719 – not a typo. The kiwi is up a similar amount at 0.7042, and the CAD has the double whammy of a surge in oil and the weaker us dollar. But with a fall of 1.5% in the USD/CAD rate to 1.3303 it is lagging a bit.

• Also worth noting is that emerging market currencies are surging as the US dollar falls as well. The USD/KRW is down 1.6% to 1127, the Brazilain real is up 2% with USD/BRL falling to 3.10 and the Mexican Peso looks like it might have had a trend change. USD/MXN is at 19.21 down more than 2% and decisively below the 200 day moving average for the first time in a year after 4 failed attempts to break below that indicator over the past 12 months.

Commodities

• A nice bounce for WTI and Brent on a fall in API inventory data yesterday morning was confirmed with another draw from the EIA which reported stocks fell 237,000 barrels last week. Through in a US dollar collapse and WTI is up 2.60% at $49.00. Brent is 2.1% higher at $51.99.

• Gold has rallied hard on the US dollar move and is up 1.7% at $1219 while base metals are higher across the board helping copper up 1.35% to $2.66.

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

• Australia - Consumer Inflation Expectation (Mar) (11am); Employment Change s.a. (Feb), Participation Rate (Feb), Unemployment Rate s.a. (Feb), Fulltime employment (Feb), Part-time employment (Feb), RBA Bulletin (11.30am)
• New Zealand - Gross Domestic Product (QoQ) (Q4), Gross Domestic Product (YoY) (Q4) (8.45am)
• China - Nil
• Japan - Foreign bond investment (Mar 10), Foreign investment in Japan stocks (Mar 10) (10.50am); BoJ Interest Rate Decision, BoJ Monetary Policy Statement (1pm); BoJ Press Conference (4.30pm)
• Germany - Nil
• EU - Consumer Price Index - Core (MoM) (Feb), Consumer Price Index (MoM) (Feb), Consumer Price Index - Core (YoY) (Feb), Consumer Price Index (YoY) (Feb) (9pm)
• UK - BoE Asset Purchase Facility, BoE Interest Rate Decision, Monetary Policy Summary, BOE MPC Vote Cut, Bank of England Minutes, BOE MPC Vote Unchanged (11pm); BOE MPC Vote Hike (11.30pm)
• Canada - Foreign portfolio investment in Canadian securities (Jan), Canadian portfolio investment in foreign securities (Jan) (11.30pm)
• US - Housing Starts (MoM) (Feb), Building Permits (MoM) (Feb), Housing Starts Change (Feb), Building Permits Change (Feb), Initial Jobless Claims (Mar 10), Continuing Jobless Claims (Mar 3), Philadelphia Fed Manufacturing Survey (Mar) (11.30pm); JOLTS Job Openings (Jan) (1am); EIA Natural Gas Storage change (Mar 10) (1.30am)

Have a great day's trading.