Stocks flat As Bond Rates And The US Dollar Lift

Originally published by AxiTrader

Quick Recap

The US dollar and US rates were higher to end the week after Janet Yellen signaled the Fed might run the economy hot. That's potentially a game changer for valuations in markets. Naturally it will evolve through time but there are very important macro impacts of this if the policy is indeed pursued by the Fed, and other central banks.

It's too early to tell yet. But traders have initially reacted as though Yellen's thoughts will ultimately become action.

What You Need To Know

International

• Stocks in the US closed flat but bonds sold off with the curve steepening again and the 10 year Treasury finishing the week at 1.79% - the highest weekly close since May. At the close of play the Dow Jones Industrial Average was up 0.22%, the Nasdaq 100 finished essentially flat, with the S&P 500 also largely unchanged at 2132.

• The big story was Janet Yellen’s speech in Boston which shock up the paradigm traders and investors have been using to look at markets, the economy, and the Fed. If you recall earlier this year Yellen and a few other Fed speakers floated the idea that because monetary policy is able to deal with an economy that is running fast or inflation which is rising in a more effective manner than if growth is sluggish and inflation low. It was used as an excuse as to why the Fed was happy to hold fire on rate hikes in the face of global uncertainty even though it had signalled that rates needed to rise.

• On Friday Yellen took that a step further saying perhaps the Fed needs to run a “high pressure economy” where the economy runs hot with a tight labour market and strongish growth in order to entrench a stronger economy. In many ways it’s a signal that like the BoJ the Fed sees the path toward a sustainable recovery as being credibly irresponsible.

• Bond traders didn’t miss the import the curve steepened and the 10’s finished at their highest since May. They look like they are on the way to 2% or there abouts. Here’s the chart from my Eikon Terminal.

• Addiing to the bond markets troubles at the margin were comments from Boston Fed president Eric Rosengren (“the market pricing for a December hike is appropriate”) and New York Fed president Dudley (expects a rate rise this year). But the message in Yellen’s hypothesis is the one we have been hearing from many many Fed speakers since Jackson Hole – the path of Fed interest rates is going to be shallow.

• So Fed hikes won’t derail stocks – we’ll need to watch the bond market for that.

• In Europe some good news over the weekend with the big Italian cooperative bank merger going ahead to help prime minister Renzi’s restructure.

• But on Brexit Watch the meeting of European leaders over the weekend reinforces the point I made last week that like a currency there are two sides to this discussion and the bad news for Hard Brexit fears is the belligerent nature of comments from EU leaders. The key point is summarised by EC leader Donald Tusk saying a soft Brexit is unacceptable. That echoes the many leaders comments which essentially say the UK won’t be able to pick and choose its options.

• China’s CPI data (+0.7% mom v +0.3% exp) was fantastic on Friday. PPI (+0.1% yoy v -0.3% exp) is back in positive territory and the CP was stronger than expected. It was a salve for the disappointment of the previous days data and sets up a big day on Wednesday with the release of GDP, retail sales, urban investment and industrial production on Wednesday.

Australia

• The S&P/ASX 200 eased into the weekend with a flat close with the miners finding some support after coming under pressure previously on the back of the Citi note downgraded Rio Tinto Ltd (AX:RIO) and BHP Billiton Ltd (AX:BHP) to sell. But after a mildly rough day on Friday it looks like it might be a better day for the miners and the banks today if the lead from the US is any guide. That hasn’t stopped futures traders from pointing to a 9 point fall on the open this morning with the December SPI futures finishing at 5406.

• Technically the local market remains at risk of breaking down if last week’s low of 5420 gives way opening up a move to the 38.2% retracement of the recent rally at 5382 – just a garden variety pullback. Here’s the chart from my Reuters Eikon terminal.

• But in no small part whether that occurs depends on how earnings season in the US goes and how far US, and other, 10 year bonds back up.

• On the week we have another speech from RBA governor Lowe, the RBA minutes, Australian jobs data on Thursday – the NAB says it should be a bumper 30,000 print – and the NAB’s quarterly (and bigger) business survey. We also get ANZ consumer confidence tomorrow.

Forex

• The US dollar surged again on Friday to finish the week at 98. USD/JPY is back above 104, USD/EUR is under 1.10, and USD/GBP is back near 1.21. The key driver of the recovery in the dollar from the previous night’s dip was the strength of retail sales which rose 0.6% in September and Producer prices which rose 0.3%.

• Taken together with the implications of Janet Yellen’s sppech this data supports the notion that the US economy offers a better risk reward than Europe, Japan, or certainly the UK right now.

• That's why the Euro closed the week at it's lowest level in months and closing in on the 1.0960 level we talked about last week, A break opens up a move into important Fibo support and the Brexit low between 1.0900/1.0940. Below that it's 1.0780.

• But a reflation trade should be good for the Aussie dollar and the commodity bloc. Nothing exciting has happened yet but the AUD/USD is back at7623, the NZD/USD is at 0.7110 and the USD/CAD is at 1.3134.

Commodities

• Saudi stocks were down yesterday, and the government said it is closing its books in mid-November (for the second year in a row) as a way to lower spending and better manage the budget. It’s another sign that the Saudi’s are serious in their intention to try to patch a production freeze deal together.

• Crude Oil closed at $50.29 and Brent Oil was at $51.95 and for the moment though much expectation is baked into the cake and traders are a little wary with prices above $50 a barrel and want to see the ink on the deal before they take prices higher again. That said the price action suggests a range to lower ($48.50ish) unless or until the topside breaks. My system is short.

• Gold is at $1250 an ounce down $7. Gold is likely to come under pressure again as long bond rates rise and even though the technical have been consolidating, and indeed suggest that rally toward $1274 I’ve been talking about gold is likely to come under pressure as the paradigm shifts for rates and changes the valuation metrics for gold. Key here is likely to be what rates do to stocks. If its nothing – gold can fall. If rates pressure stocks then gold should retain a bid.

• Copper is up a little at $2.10

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

• Australia - Nil
• New Zealand - Nil
• China - Nil
• Japan - Industrial Production (MoM) (Aug), Industrial Production (YoY) (Aug), Capacity Utilization (Aug) (3.30pm)
• Germany - German Buba Monthly Report (9pm)
• EU - Consumer Price Index - Core (MoM) (Sep), Consumer Price Index (YoY) (Sep), Consumer Price Index (MoM) (Sep), Consumer Price Index - Core (YoY) (Sep) (8pm)
• UK - Rightmove House Price Index (MoM) (Oct), Rightmove House Price Index (YoY) (Oct) (10.01am); CB Leading Economic Index (Sep) (12.30am)
• Canada - Foreign portfolio investment in Canadian securities (Aug), Canadian portfolio investment in foreign securities (Aug) (11.30pm)
• US - NY Empire State Manufacturing Index (Oct) (11.30pm); Capacity Utilization (Sep), Industrial Production (MoM) (Sep) (12.15am); 3-Month Bill Auction, 6-Month Bill Auction (2.30am)

Have a great day's trading