Originally published by AxiTrader
Market Summary
The doves are back in charge at the Fed it seems. That’s the takeaway from this morning’s FOMC statement, which seemed to focus on the lack of inflation across the US economy. Any chance of a September rate hike seems to have disappeared while the Fed’s statement balance sheet reduction will begin “relatively soon” could mean that too has been pushed out.
So bonds rallied a little, stocks hit new highs with the Dow closing up 97 points, 0.45%. The S&P 500 was up marginally with a close at 2,477 while the Nasdaq was up 0.16%. Facebook's (NASDAQ:FB) results after the bell were a beat. Stocks in the UK and Europe were higher although the currency strength may temper that a little tonight.
Here at home SPI traders aren’t as positive as they were a couple of hours ago and have now left prices where they were at yesterday afternoon’s close.
On forex markets the Fed certainly didn’t help the US dollar in its statement this morning which currency markets read pretty dovishly given the concerns about inflation. As a result the euro, yen, pound, Aussie, kiwi, and Canadian dollar are all higher than where they were immediately before the statement was released at 4am this morning. The Aussie traded to a high of 0.8013. It is still holding above 80 as I write.
On commodity markets another big inventory draw drove crude prices higher once again, copper surged on news China is looking to ban scrap imports, while gold bounced back from weakness as the US dollar collapsed.
It’s a quiet 24 hours on the data front now. But I will be watching he release of the Chicago Fed National Activity Index in the US for what it tells us about the outlook for growth.
Here's What I Picked Up (with a little more detail and a few charts)
International
- The Fed is a little rattled it seems That’s my takeaway this morning for me from the FOMC statement that was released after the decision to hold rates steady at 1.00-25% in the US. Reading through that statement I was struck by what feels like a real concern about the path of inflation and the constraint that is likely to be for the Fed’s expected path – its own at least – of interest rate rises.
- Sure the Fed said the labour market continues to expand and that it, “continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, and labor market conditions will strengthen somewhat further”. But it was the discussion of the inflation outlook where the doves found their song. The Fed said in the “near term” inflation will “remain somewhat below 2%” but “stabilise around the Committee’s 2 percent objective over the medium term”.
- Clearly we can have an argument about what constitutes the near and medium terms but given the Fed says policy will be set with reference to “a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments” it seems clear the urgency for another hike anytime soon has been reduced.
- On the balance sheet the Fed again reiterated that it will begin “implementing its balance sheet normalization program relatively soon, provided that the economy evolves broadly as anticipated”. That’s a shift from what the Fed said at the last meeting that it “currently expects to begin implementing a balance sheet normalization program this year”. Is relatively soon September or next year?
- The wash up is that the Fed did not take the opportunity to deliver the hawkish tone I thought they might and it seems the market was also expecting. As a result US dollar has come under intense pressure once again, rates eased a little, and stocks can focus on the continued earnings surprises. Goldilocks for corporate America and a weaker dollar helps the Fed on inflation. Win Win.
- US home sales for Jun rose less than expected and the previous 3 months were revised lower data released overnight showed. The print of 0.8% undershot expectations of a 1.4% increase.
- Preliminary Q2 GDP data for the UK was in line with expectations but still disappointing overnight. With a print of just 0.3% for the quarter, the UK’s year on year growth rate slipped back from 2% to just 1.7%. recall that is where the IMF said growth for the UK this year is likely to sit earlier this week.
- The data suggests an interesting conversation at the BoE next week with the desire of some MPC members to lift rates likely to be matched by governor Carney’s desire not to act pre-emptively. That said the explosion in consumer loans over the past year has alarmed the bank with regards to financial stability issues. So there is every chance the discussion around rates is robust and that we get dissenters again to what I’d expect to be a decision to hold rates steady.
- Here’s an interesting one on Europe – the ECB released a paper last night saying that ageing in the EU area will slow growth and restrain any ECB rate hikes in the years ahead. Reuters reported the paper said, “empirical evidence presented in this paper suggests that over the next decade, adverse demographic developments in the Euro area may continue exerting downward pressure on short- and long-term nominal and real interest rates, potentially limiting the ability of monetary policy to adjust its stance due to the presence of the lower bound to policy rates”. Markets don’t care today, tomorrow, or next week. But it’s worth noting for the longer run.
- It looks like Republican Senators efforts to repeal Obamacare are going nowhere.
Australia
- A good day on the stock market yesterday in Australia but the S&P/ASX 200 just failed to take out the top of the wedge pattern it has been trading in over the past few weeks. Certainly gains were broad based with only the technology sector marginally lower. Energy and basic materials lead the market higher and overnight moves in commodity markets and offshore suggest they could be among the leaders again today.
- Indeed SPI traders have market prices up again overnight after this combination of moves. At present that improvement is around 7 points (from 14 earlier) which would – if it translate to the physical market when it opens – see prices testing the top of this wedge again in trade today. A break up and through the wedge would be an unequivocally bullish move if, I say if, it occurs.
- The next target would then be 5,818, then 5,835/40. If the latter breaks then it could be off to the races.
- Turning now to the inflation data yesterday and the miss on headline was the primary focus of traders with the 0.2% rise in CPI for the second quarter causing the year on year rate to ease back to 1.9% from the 2.2% which was expected. On the RBA’s preferred measure – timed mean – the 0.5% rate was on expectations with the year on year rate holding below the RBA’s 2-3% range with a 1.8% print.
- The clear takeaway was that Australia – like the rest of the developed world – is struggling to lift inflation.
- That’s something that RBA governor Lowe highlighted in what was a perfectly pitched speech yesterday. I say that because he didn’t find the need to argue against himself and try to talk the Aussie down he simply highlighted rates are on hold for a considerable period.
- Lowe was optimistic on the economic outlook for Australia but gave a clear signal that there is no urgency for the RBA to raise rates anytime soon given where inflation and wages growth sit presently. Equally however, he did also suggest the chances of a rate cut are close to zero on current settings noting the RBA has not sought to actively try to get inflation higher because the bank is worried about household debt, housing prices, and financial stability.
“Over recent times you would have noticed that we have been paying close attention to the risks in household balance sheets. Household debt is high and rising faster than the unusually slow growth in incomes.
These developments have had a bearing on the setting of monetary policy. We have not sought to stimulate a rapid lift in inflation. The fact that the labour market has been generating sufficient jobs to keep the unemployment rate broadly steady has allowed us to be patient. Our judgement has been that seeking a more rapid pick-up in inflation through yet further monetary stimulus was likely to add to the medium-term risks. Our central scenario remains for underlying inflation to pick up gradually as the economy strengthens.”
- That means it will take a material slowdown in the economy, and the RBA’s forecasts being wrong, for the bank to cut rates.
- Equally though. the outlook for employment over the medium term is interesting insofar as it suggests a falling unemployment rate. Which brings me to one of my favourite long term single factor relationships for the Aussie dollar. That is the long run monthly correlation between the unemployment rate (inverted) and the AUD/USD rate. Here’s the chart:
Forex
- Any chance of a US dollar recovery has been postponed for now. That’s the key takeaway from the Fed statement and market price action overnight and since the announcement this morning at 4am. Clearly we need to see a material improvement in US data flow or a deterioration in the flow of data in other jurisdictions now that the Fed is out of play on the rate hike front for the next few months.
- While no one really expected any move today from the FOMC this morning you can see in the price action that markets were expecting the Fed to continue to focus on strong labour markets and so deliver a slightly hawkish hold. That they focused on inflation, its weakness, and the prospects it will only return toward the target over the medium term was taken as a dovish slant. Hence the US Dollar Index collapse you can see in the chart below.
- And so it is that we are seeing new highs for this run in the euro (currently 1.1726) , pound (yes despite weak growth it's above 1.31), the Canadian dollar (1.2444!!!), the kiwi (0.7513 at the moment), and of course the Aussie dollar which is at 0.7993 after a high of 0.8013.
- Looking at the Aussie I noted earlier this week that it could be the FOMC meeting which could actually be the big mover for the AUD/USD this week. And that has certainly been the case. Yesterday’s inflation data and RBA governor Lowes straight bat saw the Aussie trade down to a low in the 0.7860/65 region. But it had already recovered pre-FOMC announced to roughly unchanged on the day. And of course we have had a big rally.
- I’ll write more about the Aussie in my daily AUD/USD column, and more on forex more broadly in Forex Today. But the key takeaway for me is that the circuit breaker to US dollar weakness, for Aussie, euro and other strength, is absent right now. So the question is how far will this rabbit run.
Commodities
- Oil is up again overnight after the EIA inventory data confirmed the big draw down we saw in the private sector API data the night before. The EIA said that crude inventories fell by 7.2 million barrels last week against expectations of a 2.6 million barrel draw. We also saw higher than forecast draws in gasoline and distillate inventory levels as well.
- As I’ve written before it is US inventory levels which would ultimately be the pure empirical metric by which the market – and traders – could judge the efficacy of OPEC’s production cut. That the Saudi’s have also made it clear they are playing a long game by restricting supply to Asia and North America is a big part of this as well.
- So the wash up is that this morning WTI is up another 1.65% to $48.68 a barrel. Brent is up 1.39% to $50.90. Oil is nearing the top of the current uptrend channel now which might slow prices. But as I wrote yesterday a projection into the $49.25/85 region for WTI looks on the cards. The 200-day moving average comes in at $49.44.
- Gold has ripped higher after the FOMC meeting and weakness in the US dollar. At $1.260ish gold is up around $17 dollars an ounce on the overnight low. It’s a dollar story here and gold has benefitted because of that and the fact that rates eased a little along the bond curve overnight.
- Copper surged again after news broke yesterday that China is looking at cutting scrap imports from 2018. Naturally less scrap equates to higher demand for the source product. That saw prices gallop all the way to $2.90 a pound at one stage before pulling back a little to sit at $2.87 a pound for a gain of 1.02%. It’s not beyond the realms of possibility with this break out that copper won’t extend to $3.10.
- Germane to the discussion on copper going forward was news overnight that Freeport-McMoran (NYSE:FCX) is close to inking a deal with the Indonesian government with regard to the Grasberg mine. That sent shares in the company to a 16 month high Reuters reported this morning
Have a great day's trading.