Tensions Continue To Ease In Markets

Originally published by AxiTrader

Market Summary

Solid data out of the US overnight reinforced to forex and bond traders that maybe the Fed is right about the growth trajectory for the economy. That gave the US dollar a bid tone again, saw bond rates rise a little, and increased expectations about a December rate hike.

That didn’t hurt stocks specifically with the S&P 500, Dow Jones Industrial Average, and Nasdaq all either side of flat. And at 2.26% the US 10-year is well short of its highs for the year but it is up 8 points in 3 sessions.

Likewise after Friday’s lows the US dollar has rallied strongly against the yen, pound, and kiwi, which have lost between 0.65% and 0.80% against the dollar. The euro is at 1.1736, down around 0.4% and the Canadian dollar lost around a quarter of a per cent. For the Aussie further weakness in commodity prices, concerns around Chinese growth (accentuated by IMF warnings last night) knocked the Aussie to a low around 78 cents last night. It’s at 0.7820 this morning.

On commodity markets it was China concerns which again hit prices lower but they recovered to be roughly unchanged. The receding tensions over North Korea and a stronger US dollar hurt gold, which is back at $1272 while copper suffered again from an overbought technical outlook and China worries.

On the day today its wages growth in Australia,

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

International

• Solid data from the US last night with retail sales for July rising a much better than expected 0.6% during the month. That follows the upgrading of Junes retail sales to 0.3% and easily beat expectations of a 0.4% growth in sales. That’s the strongest increase since December last year.

• Also out last night was the NY Fed’s Empire Manufacturing index which leapt from 9.8 in July to 25.8 in August. Taken together with the stronger than expected rise in export and import prices in July (0.4% and o.1% respectively) it’s another sign the US economy is on the track the Fed has articulated.

• Thus it reinforces the notion – articulated by NY Fed president Dudley the previous day – that the Fed will announce a tapering in September and is still on track to hike again in December. And the wash up is that the Citibank Economic Surprise Index for the US again rose. It’s at -25.8 now from -68 a month ago.

• And here is a good reason the Fed is on the path it’s on and why US wages growth is subdued but the Fed is acting as if it believes wages growth will accelerate. On Monday a San Francisco Fed blog post followed up research done previously which showed that it’s high paid boomers leaving the US work force and being replaced by younger, less experienced workers on lower wages which is retraining wages growth. The authors say “Wage growth for continuously full-time employed workers (blue dashed line) has been rising and is currently in line with rates seen at the previous economic peak in 2007”. But they added that “aggregate wage growth (black line) continues to be held down by the entry of new and returning workers to full-time employment, who generally earn less than workers who are leaving full-time employment”.

• The authors highlight it is because of the replacement effect that wages are being held down. “Simply stated, new entrants to full-time work, whether they are entering for the first time, re-entering from periods of involuntary or voluntary non-employment, or moving from part-time to full-time work, are more likely to make below-average wages”. At some point things will normalise and wages will accelerate and an accelerated pace. The question is when. Viewed in this context it is now wonder the Fed is normalising rates in the US. Not tightening, normalising. I wonder is this dynamic at work here in Australia???

• Q2 German growth was strong at 0.6% but it still undershot the markets expectations of a 0.7% increase. That miss was balanced by the 2.1% print for yoy growth which was better than the 1.9% expected.

• Also out last night was UK inflation data which suggests the Bank of England might be right about inflation in Britain nearing its peak. Headline inflation fell 0.1% in July with the headline rate staying at 2.6% year on year.

• North Koreas statement yesterday that it would watch the Yankees before acting on the threat to send a missile toward Guam was taken as a de-escalatory step by most pundits and the market. Possibly just as important was the comments from the South Korean President that any US attack on the DPRK should seek the agreement of the South first.

• The latest monthly survey of big institutional investors conducted by BAML is out and the key takeaway for me is the stock market faces headwinds according to active investors. I say that because only 33% think profits will improve over the next 12 months and a net 46% (a record high) say stocks are over valued.

• The IMF upgraded the outlook for China this year but warned about the outlook. That's because the fund believes that the point targetting approach the Chinese use, and the debt that goes with it to sustain the growth to achieve those targets, is dangerously destabilising in the long run. Hard to disagree. But for the moment Chinese authorities are on track to double the economy between 2010 and 2020.

Australia

• The minutes from the RBA’s board meeting earlier this month were released yesterday. But, they didn’t really add anything we didn’t already know from the governor’s statement of the quarterly SoMP. We certainly got a sense that its household debt, and the housing market which will continue to restrain the bank from easing again – even if inflation stays low. We also heard that growth is expected to be strong and head toward potential.

• On the Aussie dollar we didn’t see anything more overt than we had already heard from the bank. But the RBA did again highlight the any further rise in the AUD/USD (or TWI) would impact on the outlook for both growth and inflation.

• But, the RBA is worried about debt and wages and the vulnerablility that might pose to the outlook. “Ongoing low wage growth and the high level of debt on household balance sheets raised the possibility that consumption growth could be lower than forecast,” the minutes said. As readers know that is my biggest risk to the economy. That consumers focus on debt repayment and not consumption. But, as the RBA says – it’s a risk.

• So net on net – it was a steady as it goes message that rates won’t be rising in a hurry, that the economy could do with a weaker exchange rate, but that the economic outlook remains positive. Who could disagree?

• Looking at the ASX then, SPI traders are nonplussed about the outlook after the price action overnight with prices down 2 points as I write after yesterday’s half a percent rise to close at 5,757. That’s a solid two day rally and it’s a continuation of the local market’s trading range morphing from the wedge we’d been watching to a range as I suggested was likely last week.

• All that means is that traders are still lacking the catalyst to break substantially higher or lower this earnings season. Today we get the Commonwealth Bank Of Australia (AX:CBA) going ex-dividend which will be a headwind for the market. And wages data may weigh on consumer facing sectors if they continue to show weakness. But overall the market is caught in that range.

Forex

• The US dollar is back as tensions ease on the Korean peninsula and this improvement in data I’ve been mapping for a few weeks now continues. As I highlighted above the improvement in the data flow has seen the Citi Eco Surprise Index for the US rise around 43 points in the past month. It took some time for traders to notice but the evidence is in that the economy is moving in the direction the Fed has been articulating. That does not mean the US dollar is out of the woods against the euro, we’d have to see prices trade down and through 1.1680 for that to be confirmed.

• But we did see new lows against other currencies as traders react to this better outlook for the US economy and what that means for the Fed. To me that path is as Bill Dudley, of the NY Fed, said yesterday which will include a taper of the balance sheet and another hike in December.

• On the Aussie dollar it is worth talking about something else the RBA said yesterday. The bank highlighted that Chinese and European growth has picked up. But it’s always my contention that it’s not the data that’s important but rather how the data prints relative to expectations. So that said, its clear China and Europe are doing okay. But it’s equally clear we have seen a slowdown in the data flow – the prints – relative to expectations. Here’s a chart I tweeted out yesterday highlighting the relationship between the AUD/USD, China’s eco surprise index, commodity prices, and more loosely the EU eco surprise index. Note the Aussie has fallen since I tweeted this yesterday.

• Elsewhere the inflation data in the UK hurt sterling a little last night. It’s down 0.78% at 1.2862 and testing the recent uptrend.

• USD/JPY surged with the yen falling 0.88% now with USD/JPY at 110.58. The kiwi is down at 0.7234 off 0.69% and the Canadian dollar has lost more ground with USD/CAD at 1.2754, up 0.3%

Commodities

• Gold is an obvious victim of the de-escalation of tension on the Korean peninsula and a stronger US dollar. At $1,272 gold has fallen 0.8%.

• Crude was lower, busted the trend line but then came back to be largely unchanged this morning. The discussion is still in large part around Chinese demand going forward, plus of course US demand, and the supply balance offset.

• And to be honest what I find amazing right now is that these massive draws we are seeing in Crude - API data this morning showed inventories fell 9.2 million barrels in the past week - is not having any real or lasting impact on the front months. It tells you much about the overall bearish stance of many traders. Or that there are truly real concerns about China.

• Let's see if this uptrend holds or if price is headed back toward $46.20/30.

• Copper is topping it seems as trader again worry about the outlook for Chinese growth and prices look a little over extended.

Have a great day's trading