Strong US Data Drives Stocks And Bond Rates Higher

Originally published by AxiTrader

Key Takeaway

No need for stocks to fear bond rates rising when it’s all on the back of stronger data. That’s what we saw again last night with solid CPI and retail sales data again highlighting that the US economy is in fairly healthy shape.

So it’s more records for US stocks, a bond market breakout, but the US dollar couldn’t capitalise on these moves.

That helped the Aussie dollar hit 77 cents and lifted a weight off gold which is back above $1230 this morning.

What You Need To Know

• S&P 500 +12 (0.5%) 2349 (8.30 am Sydney)
• Dow +107 (0.5%) 20,611
• Nasdaq 100 +37 (0.7%) 5819
• SPI 200 -3 (0.1%) 5756
• AUDUSD 0.7713 0.7%
• Gold $1233 +0.4%
• WTI Oil $53.01 -0.36%

International

• It’s been another good day for stocks across the globe with the Dow, Nasdaq and S&P making new records overnight. The FTSE, CAC, and DAX are all up as well. The key is the data and president Trump’s recommitment to the release of the tax plan everyone is waiting for.

• So at the end of the day US stocks have posted another record close.

• US data was stronger again last night with the January CPI doubling expectations with a print of 0.6% for the month. One month! That saw the YoY rate accelerate to 2.5%. Prices ex-food and energy printed a 2.3% YoY rate. That’s enough on its own to increase the odds of a Fed tightening in March. But throw in strong US retail sales for January - +0.4% with ex-auto’s up +0.8% - and the big leap in New York Empire State manufacturing index – which rose to 18.7 from 6.5 in January – and the momentum for a March rate hike has risen.

• So, Bonds are higher after the strong US data and Janet Yellen’s testimony. As a result the US 10 year treasury has broken up and out of the recent consolidation. That has also taken the Australian 10 year rate up and out of its own consolidation phase also. As I highlighted in my piece on US 10’s yesterday – which I called the most important chart in the world – this break is an important one. It biases rates at least to the recent high at 2.6% and 2.80% respectively for US and Australian 10’s. But it also suggests a recommencement of the upward drift in rates after this recent consolidation. 3% in Australia and 2.8% in the US seem to be in the frame now.

• But as I highlighted in yesterday’s piece that doesn’t necessarily derail the Trumponomics equity rally. That’s because at the moment bonds are moving higher in response to the improved data and economic strength. But bonds through the levels I highlighted above – 3% and 2.8% - might change that outlook and weigh on stocks.

• Naturally, with US bonds higher other bond markets across the globe have also risen. That makes the Bank of Japan’s job of holding down rates all the more difficult at the moment. But my sense is the bank knew that when they instituted their policy last year. It was expressly aimed at keeping rates – and the Yen I guess – low while the economy relfates.

• On rates, Janet Yellen followed up with a second session before congress - this time it was The House. Yellen reiterated that the US economy is in good shape. Elsewhere on the Fed speaker front Boston Fed president Eric Rosengren said given the strength of the economy and tightness in the labour market there was a chance of an "overshoot" in growth and as a result the Fed may need to undertake a "more rapid" rate tightening policy.

• On that topic Japanese prime minister Abe said yesterday that president Trump understood that monetary policy is not currency manipulation. Ostensibly that opens the way for USDJPY to head toward 117/118.

• A working paper from China’s central bank yesterday said the PBOC should continue to prudently manage the nation’s debt and deleveraging process in a manner to avoid any asset bubbles or a liquidity crisis. I know that sounds like a motherhood statement, but just a day after record lending figures it highlights the continuing struggle within China, and by its authorities, to satisfactorily rein in the economy.

• Looking elsewhere Iran is about to release a movie – 4 years in the making apparently – which show the republican Guard beating up the US Navy in a war. Interesting timing with president Trump – in his press conference after meeting with Israeli prime minister Netanyahu – reiterated he wants to contain Iran and defeat any nuclear ambitions.

Australia

• It was a cracking day for the ASX 200 yesterday with a 0.94% gain – 54 points – and close at 5809. That’s the highest close since May 2015 and another sign the bulls have this market in hand. Naturally yesterday’s stellar result from the Commonwealth Bank Of Australia. (AX:CBA) which reported a bumper profit and closed up more than 2% at $84.53 set the scene for a rally in the other banks and the market as a whole. But corporate reporting also saw many other stocks drive higher as profit jumped or the outlook was upgraded.

• While it was a stellar day for the market not every stock had a great day. Indeed Domino’s had a day to forget falling 14.36% and Primary healthcare lost more than 11%. Now readers know I’m not a stock analyst – this macro stuff is enough for any one bloke without trying to do the individual stock universe as well. But I highlight this as a way to again reiterate that my overriding investment/trading thesis in the current environment is that active management of positions will deliver more than a simple adherence to the index. The world has gone passive – that means opportunities to buy and sell in stocks, bonds, commodities, and forex, abound.

• Anyway, looking at the day ahead traders will likely be disappointed that the SPI 200 March futures is down this morning. At 5.40am Sydney time the SPI is down 8 points to 5751. Perhaps it’s a reflection of the fact the 0.94% gain yesterday was much bigger than the overnight moves in other markets. Or perhaps it’s a reflection that the local market has once again caught up to the moves in the US. At least in relative terms as the chart below shows.

• We have a huge number on the data docket today with the release of Australia’s January jobs data. This is a huge risk for stocks and the Aussie dollar if it undershoots expectations of a 10,000 rise. I say that because there is a little bit of hype about the RBA’s positive outlook and the very strong employment index contained with the NAB’s business survey. Throw in the release yesterday of Westpac’s job index – which hit its highest level since May 2008 in January – and we get a real sense the economy and jobs market is on the up.

• So while I say the expectations built up are a risk Westpac itself has extrapolated this index into a forecast of 20,000 new jobs in January. That would be a very solid increase but Australian jobs data has become notoriously volatile so as hard as forecasters try to get this number right the very nature of its collation and calculation makes that problematic. SO traders wait – until 11.30am AEDT this morning, then we’ll know.

Forex

• The Australian dollar is being dragged higher by a confluence of local and international positives. Strong commodity prices, reduced chances of an RBA rate cut, an improvement in risk appetite as stocks rally and recalcitrant buyers enter the market, and the continuation of global data printing stronger than expected. Last night’s US data was just the latest in a continuation of this trend. So even though that could, or should have, helped the US dollar what it does is provide a really positive backdrop for currencies leveraged to global growth.

• As a result the AUD/USD finds itself at 77 cents this morning. It still hasn’t taken out 0.7720 resistance with a high at 0.7708 overnight but the bulls are getting a little less tentative up here at a level that has been a graveyard for them for a year now. Today’s jobs data is the key. A strong number should see the Aussie on its way toward 0.7770.

• Elsewhere in forex land the US dollar didn’t really get the lift it could have from the data. That’s weird to be frank and the US dollar’s inability to hold gains which drove the US Dollar Index to 101.76, USD/JPY to 114.95, and euro down to 1.0522 again reinforces that “long dollars” remains a very crowded trade right now.

• So this morning we have euro at 1.0587, yen at 114.25, pound at 1.2444, and theCanadian dollar at 1.3085.

• Like the Aussie the kiwi is higher rising 0.5% to 0.7206 while the Brazilian real, and South African rand continued their rally. Positive global growth and data surprises seems like it has lead traders and investors to broaden their horizons once more an add a little risk to their portfolios.

Commodities

• So what’s the definition of a bull market? It looks like crude oil might be it. I say that because even though the EIA again reported a massive inventory build of more than 9 million barrels last night – taking the two-week total to more than 24 million – crude has hardly moved day on day. Nymex is sitting at $53.19 this morning while Brent sits at $55.90.

• Gold remains the most interesting of commodities at the moment. Rising rates and growing investor ebullience would normally be bad news for gold yet it is back up above $1231 this morning. Perhaps it’s the obvious uptick in inflation, or the still high uncertainty around European elections that is keeping gold bid.

• But equally gold is charting very nicely at the moment. Last night it again retested support around $1219/20 before bouncing. While that level holds the outlook still points higher.

• Copper is a little like gold, retesting the breakout as traders wait for the mediation talks at the Escondida mine to begin. It’s at 2.74 this morning.

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

• Australia - Consumer Inflation Expectation (Feb) (11am); Unemployment Rate s.a. (Jan), Employment Change s.a. (Jan), Part-time employment (Jan), Fulltime employment (Jan) (11.30am); Participation Rate (Jan) (12.30pm)
• New Zealand - Business NZ PMI (Feb) (8.30am)
• China - Nil
• Japan - Foreign investment in Japan stocks (Feb 10), Foreign bond investment (Feb 10) (10.50am)
• Germany - Wholesale Price Index (YoY) (Jan), Wholesale Price Index (MoM) (Jan) (6pm)
• EU - ECB Monetary Policy Meeting Accounts (11.30pm); EU leaders summit (3am)
• UK - Nil
• Canada - Nil
• US - Building Permits (MoM) (Jan), Housing Starts (MoM) (Jan), Building Permits Change (Jan), Housing Starts Change (Jan), Initial Jobless Claims (Feb 10), Continuing Jobless Claims (Feb 3), Philadelphia Fed Manufacturing Survey (Feb) (12.30am); EIA Natural Gas Storage change (Feb 10) (2.30am)

Have a great day's trading.