This Could Be A Big Week

Originally published by AxiTrader

Market Summary

Non-farm payrolls printed a better than expected 209,000 in July easily beating expectations. But it was the earnings growth of 0.3% during the month which gave some hint that the tightening labour market in the United States might actually be having the impact the Fed has suggested it eventually would.

Indeed as Gary Cohn, president Trump’s chief economic adviser, told Bloomberg TV on Friday – annualised earnings growth is now running faster than the 2.5% year on year rate.

So the takeaway from the data was positive. Positive for stocks which rallied a little with the Dow Jones Industrial Average printing another record high up 67 points, 0.3%, to close at 22,092. The S&P 500 was up 0.2% to 2,476 while the Nasdaq Composite was 0.2% higher at 6,351. Stocks in Europe had a cracker of a night with London up 0.5% while Frankfurt and paris fairly surged with gains of 1.18%, and 1.42% respectively.

So it’s no real surprise SPI traders marked prices 24 points, 0.42%, higher as they bet that the local stock market will have a better day ahead after Friday’s 0.25% loss.

On forex markets the US dollar found a solid bid making gains across almost the entire forex universe. The euro is neatly back under 1.18, the pound is back near 1.30, USD/CAD is back in the mid-1.26 region and the Australian dollar is down at 0.7922 after a low of 0.7888 on Friday night.

Bonds were a little higher Friday as was oil which rose 1.12% in WTI terms to $49.58. Copper also liked the message of the US data and is still holding firm at $2.89% but gold came under pressure as the US dollar rallied.

Today is fairly quiet here in Australia with only the release of ANZ job adds and the construction PMI out. But we have a huge week insofar as the one and only NAB business survey is out Tuesday with Westpac’s Consumer sentiment out on Wednesday. These are the data points for me.

Internationally this could be a big week too. Chinese trade data will be a big event Tuesday, along with UK NIESR GDP estimate, and the NFIB survey in the US. Then we get JOLTS, and the IBD/YIPP sentiment survey. Wednesday is Chinese CPI and PPI, Thursday is the next RBNZ meeting, as well as US PPI. Friday rounds out the week with US, German, and French CPI data.

It might not be a non-farms week but it’s still a big one.

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

International

• US non-farms payrolls were better than expected with a 209,000 print, unemployment fell to a cyclical low of 4.3%, and average hourly earnings gained 9 cents or 0.3%. It was a solid report all around and one which will give the Fed hawks confidence that the outlook for the economy is heading along the path they had thought most likely.

• Of course the lack of inflation in the US – and the developed world more broadly – is a big issue for central bankers and one that tempers the aggression with which the Fed can pursue its monetary policy normalisation process. But this data Friday suggests more Fed action than many had been starting to think likely in 2017.

• That’s because the doubts over the US economic outlook and the Fed's approach to it were given an uppercut by what can only be read as solid jobs data on Friday. The combination of stronger jobs and wages growth, a fall in the unemployment rate, and an increase in the participation rate all scream a strong labour market. That, in turn, reinforces the Fed's path back toward policy normalisation. It suggests the tapering of the balance sheet will begin soon and more rate hikes are coming. That's good for the US dollar but not so good for long bonds. And just look at copper’s performance relative to gold – that tells us something about growth expectations.

• And on the growth front it’s worth noting what Gary Cohn said. Not only did, did he suggest the roughly 3.6% annualised earnings growth rate was encouraging, he also said the Trump Administration is focussed on tax cuts in the Fall. That's in the next couple of months, perhaps next month, and it highlights that for all the distractions of the Russia probe the Trump team is still trying to drive its agenda forward. Any success will send bonds, the US dollar, and probably stocks higher.

• Russian foreign minister Sergei Lavrov met with his US counterpart US Secretary of State Rex Tillerson over the weekend in Manilla. It was likely to have been a somewhat frosty meeting given the recent deterioration in relations but Lavrov told reporters “We felt the readiness of our US colleagues to continue dialogue. I think there's no alternative to that”. Indeed!

• News in the UK press over the weekend says that the UK is ready to pay 40 billion pounds as a Brexit/EU membership termination fee. Via Reuters, "We know (the EU's) position is 60 billion euros, but the actual bottom line is 50 billion euros. Ours is closer to 30 billion euros but the actual landing zone is 40 billion euros, even if the public and politicians are not all there yet," the Sunday Telegraph quoted one "senior Whitehall source" as saying.

• Here's an interesting stat - Reuters reported over the weekend that Amazon (NASDAQ:AMZN) had been mentioned in 130 US company reports so far this earnings season. We know the RBA and other central banks think there is a bit of an Amazon effect on inflation but the reach, and potential disruption, is growing.

Australia

• We should have a better day of it today on the local stock exchange. At least that’s what SPI traders are betting on after taking prices 24 points higher in trade Friday night. That gain comes after Friday’s mixed day saw the index 15 points lower after the Commonwealth Bank Of Australia (AX:CBA) collapsed close to 4% in the wake of the revelation about the AUSTRAC allegations. Westpac Banking Corporation (AX:WBC) and the ANZ Banking Group (AX:ANZ) were lower but the National Australia Bank (AX:NAB) and Macquarie Group (AX:MQG) ended the day higher. Likewise the big miners, Woolworths (AX:WOW) and Wesfarmers (AX:WES) were also higher. Only 82 stocks fell while 92 stocks were higher. So arithmetically save for the CBA it wasn’t a terrible day at all.

• But the physical ASX is still constrained within this wedge pattern I’ve been talking about for a while now. It’s a much flatter pattern when you look at our AxiTrader SPI CFD – but it’s a message of a constrained market nonetheless. The parameters that need to give way on either side are 5,776 topside and 5,691 bottom side. The levels on the SPI CFD are 5,739 and 5,590/5,600.

• Looking back on Friday’s June retail sales report – for the month and the quarter, has to give me some confidence that the economy is moving in the direction the RBA has said it was moving. The 0.3% month on month growth was a little better than 0.2% expected. The year on year pace rose to 3.8% and the quarterly number, which helps give a good read of where household consumption is as we await the Q2 GDP, rose 1.5%. That was much stronger than the 1.2% expected. That, as IndeedAU’s local economist Callum Pickering tweeted Friday was the strongest quarter since 2013.

• That said however the RBA signalled Friday – in its SoMP – that while it is still very positive about the outlook for the economy it did find it necessary to downgrade the outlook for growth and inflation. Enough to signal the higher Aussie is already biting, and – in saying that the forecasts were made at current AUD/USD levels, around 80 – effectively warning that further AUD/USD strength would seriously harm the economy.

Forex

• The US dollar gained a lift from the stronger that expected non-farms print for July, June's mild upward revision, solid earnings, 4.3% inflation, and Gary Cohn's comments. But it’s a little more than that isn’t it. As I’ve been saying since I returned from holidays the US dollar’s weakness hada caught up, and then exceeded, the weakness in the dataflow from the US which has slowly started to improve.

• At least it suggests a strong US dollar pulse higher, at worst that much is already factored in and US dollar shorts are vulnerable. Here’s the price of EUR/USD versus the Citi US Economic Surprise Index.

• Looking specifically at currency pairs this morning we have euro at 1.1773 , GBP sitting at 1.3032 , and the yen is trading a little weaker with USD/JPY at 110.77.

• Of particular interest Friday, was the price action in the pound which highlights how quickly the worm can turn when much is factored into prices. Naturally pre-BoE meeting last week that was pound bullishness, BoE hawkishness, and bad juju for the US dollar. Thursday's dovish BoE meeting and forecasts plus the release of non-farms hammered Sterling. So much so that comments from BoE deputy governor Broadbent in the BBC that rates could still rise were completely ignored by traders.

• That makes GBP my Forex chart of the day for this column today.

• Looking at the commodity bloc we see all three currencies came under pressure late last week. The Canadian dollar traded from a low around 1.2414 to sit at 1.2647 this morning. The kiwi is more than 100 points off its high for the week at 0.7398 this morning while the Aussie dollar, which briefly traded above 0.8040 last week is sitting at 0.7923 this morning. That’s after trading down to a low of 0.7888 on Friday night.

Commodities

• Bullish bets on copper have hit their most extreme levels according to Reuters which says “Speculators upped their bullish stance in copper futures and options by 18,645 lots to a record 104,268 lots, according to the data going back to 2006”. I confess that my CFTC data for big speculators is nowhere near as bullish based on the latest read of the CFTC data released Friday. But assuming Reuters is right that’s a potential vulnerability for copper in the very high $2.80 region.

• It's looking a lot like Aussie, euro, and other forex pairs did a week ago. That's no guarantee it will fall. But the setup is there.

• Gold came under pressure Friday after the solid non-farms suggested the Fed will be in track to begin its balance sheet reduction process September and perhaps follow up with another rate hike come December. That biased both the US dollar and bond rates higher putting downward pressure on gold. Of course that fundamental downward pressure neatly fit with the technical set up I was discussing last week. So the outlook is for gold to pullback toward $1247, perhaps $1230/32.

• Crude oil liked the strength of the US jobs report with WTI and Brent both climbing higher Friday to close at $49.58 and $52.42 respectively. Prices are still down on the week after Tuesday’s big reversal off overhead technical resistance and consequent big outside day. And while oil did have a much better day of it on Friday, and even though I strongly believe the fundamental backdrop for supply and demand is moving in the bulls favour the market is getting very long again.

• CFTC data released Friday showed that as at August 1 – last Tuesday – the net long position of the big speculators had climbed to 486,765. That’s the most long the bulls have been since early March this year when oil collapsed $6 dollars a barrel in WTI terms. As you can see in the chart below the big specs swing an important line when it comes to overall prices for oil.

Have a great day's trading.