Traders Are Not Sure What To Do

Originally published by AxiTrader

Market Summary (7.49am)

It would have been a shock if the Fed deviated materially from its recent pronouncements at Janet Yellen’s last meeting as chair and as she hands over to the Fed’s new boss Jerome Powell. But there was a subtle and distinct upgrade to the language around the expansion in the US economy with employment, household spending, and business fixed investment said to “have been solid”.

That’s been enough to give the US dollar and US rates a bit of a lift, but not scary enough to knock US stocks, which have recovered somewhat today, back into negative territory.

So as I write the US Dollar Index is at 89.10, the euro is at 1.2410 off both off their highs and lows for the day, while the Dow is up 0.36% and the S&P 500 has risen 0.01%. The Nasdaq is up a little more with a 0.18% gain. Watching the price action though these last couple of hours it seems clear traders aren’t exactly sure what to make of the Fed’s upgraded assessment for the US economy and inflation – mild as it was.

Europe was mixed overnight. The FTSE lost 0.7%, the DAX was basically flat and the CAC rose 0.15%. The French economy seems to still be surprising with better than expected data which might help the CAC a little – relative to the DAX anyway. Asia was also mixed yesterday.

No such confusion here in Australia though with the support zone of 5,990 holding firmly for the S&P/ASX 200. From around that level both the physical and the SPI off its own very important support zone, launched a solid rally such that the 200 index ended up finishing at 6,037. Overnight SPI traders have added another 6 points. But we’ll see how the US finishes up.

Back to forex now and the Aussie dollar is breaking out of the uptrend it’s been in since the 7501 low last year. Yesterday’s CPI didn’t help, nor did base metal action or the fact the US dollar has stopped falling. At 0.8057 the Aussie is down 0.3% and biased lower. The Kiwi’s amazing run continues though. It’s up 0.55% at 0.7369. USDJPY is higher which I think could be a sign the worm might actually be turning for the Buck – it’s up 0.3% to 109.15. I sense some correlation diminution.

On commodity markets, US data showed much bigger than expected builds in inventory levels and another increase in US production and exports. But oil is a little higher suggesting the last couple of days falls were all about the EIA data and expectations of same overnight. Gold bounced more than $10 from the $1332 lows in a short window this morning and is at $1346, while copper sits calmly around $3.21 a pound.

On the data today we get building approvals and import and export prices here at home. Then it’s PMI daya all over the planet. They have been strong recently. Let’s see what today brings. Chian and South Korea are my main picks to watch. US data tonight includes the ISM as well as productivity and labour costs.

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

International

• A nicely balanced intro to the FOMC statement which highlights that growth, unemployment, and investment are solid. Inflation is still low but later on the statement the Fed says it will be rising through the year ahead. 4 hikes for me in 2018. Here are the key excerpts.

• INTRO: Information received since the Federal Open Market Committee met in December indicates that the labor market has continued to strengthen and that economic activity has been rising at a solid rate. Gains in employment, household spending, and business fixed investment have been solid, and the unemployment rate has stayed low. On a 12-month basis, both overall inflation and inflation for items other than food and energy have continued to run below 2 percent. Market-based measures of inflation compensation have increased in recent months but remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.

• 2ND PARA: Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with further gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will remain strong. Inflation on a 12‑month basis is expected to move up this year and to stabilize around the Committee's 2 percent objective over the medium term. Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.

• President Trump’s SOTU speech yesterday was long, boy was it long. But it was actually pretty good and we did see the say guy who spoke at Davos pop up on Capitol Hill. Sure the Democrats didn’t like it. But he was talking to his base and he has the wind of the economy at his back. You may love or hate Trump but so far things are running his way. The reason I raise this is because I want to highlight what Greg Valliere, Horizon Investment’s Washington based chief global strategist, had to say about the speech and about the President. Greg said (my bolding, his capitals), “VIRTUALLY ALL OF THE MAINSTREAM MEDIA ripped President Trump's speech last night – but we have to ask: what were they watching? It was the best speech of Trump's life, too long but well-written and well-delivered. A CNN poll showed that 48% of viewers had a very positive reaction and 22% had a somewhat positive reaction – so 70% liked it. Except the press. REGULAR READERS KNOW I'M NOT SHY about criticizing this flawed president, but was dismayed by the tortured attempts to criticize everything he said…. BOTTOM LINE: We stand by yesterday's assertion that like all State of the Union addresses, this one will be forgotten in a few days. But Trump's toned-down act – the Davos Trump – may represent a more lasting change; we'll see if he resumes his demagogic tweets. But make no mistake: the press won't acknowledge what a force Trump is, now with much to brag about, and we have to wonder if we're beginning to see the emergence of a crude version of Reagan”. Reagan folks. That’s two terms!

• Why is this important for markets? Because for me one of the things holding back the dollar has been global investors views on the President, his ratings, and the sense that somehow, somewhere he’ll unravel. If after a year he is finding his feet amid a strong economy, roaring stock market, and has plans for a big infrastructure spend then three things become clear to me. One, stocks will keep trending – note I say trending – higher. Two, rates will keep trending higher as well, And three, the US dollar will turn around as the US inflation and economic performance against steps away from Europe and other areas. Time will tell I guess.

Okay, to the other stuff that has happened in the past 24 hours.

• As if to underscore the inflation the Fed sees coming data last night showed US labour costs were on the rise again in Q4. Via Reuters, “the Employment Cost Index, the broadest measure of labor costs, increased 0.6 percent after an unrevised 0.7 percent rise in the third quarter, the Labor Department said on Wednesday. That lifted the year-on-year rate of increase to 2.6 percent, the largest increase since the first quarter of 2015, from 2.5 percent in the third quarter”. Inflation is coming.

• And, and, and even though it has become a terrible lead for non-farms the ADP payrolls data again shot the lights out last month. Data released last night showed private payrolls rose by 234,000 in January, beating economists’ expectations for an increase of only 185,000.

• German retail sales undershot in December falling 1.9% in what the retail association said is a reaction to the lack of clarity around the government formation and political uncertainty that brings. As a result of the ongoing lack of resolution the retail association HDE says retail sales in 2018 will fall to just 2% growth from last year’s 4.1% rate. Germany’s “harmonised” unemployment did dip to 3.6% though from the previous month’s 3.7% or 5.4% in the usual language). No wonder IG Metall reckons its okay to mount industrial action.

• The EuroArea core inflation data last night showed an uptick in January from 0.9% to 1.0% with the headline print staying at 1.3%. This is still a long way from the ECB’s target and the Euro’s strength won’t be helping it achieve it goal. That’s something that Benoit Coeure highlighted overnight when he said forex volatility could lead to unwanted tightening. No one really wants a stronger currency.

• And while I’m in Europe, Germany had to pay to issue a 5 year bond for the first time since 2015. It issued €3.2 billion of 5 year bonds at 0.08%. Still a tiny number obviously. But another sign global bond rates are rising.

• Former Fed chair Alan Greenspan was on Bloomberg TV shortly after the FOMC announcement and said he can see two bubbles. Bonds and Stocks. The former is the most dangerous in my opinion. Credit spreads in Europe in particular.

• Chinese President Xi speaking to his Politburo called for continued reform of the economy along more modern lines Xinhua via Reuters reported.

• Canadian Prime Minister Trudeau said overnight he doesn’t think President Trump will pull the US out of NAFTA.

• Steve Mnuchin is worried about the debt ceiling, and is already urging Congress to raise it. Worth noting it’s not part of the government shutdown debate that has been occurring recently and is due again in the next couple of weeks. But it does become relevant again in a couple of months. So to start talking now is a good thing. It won’t be an easy task though.

Australia

• Well that was perfect. The release of a benign CPI yesterday which suggested no chance of an RBA rate hike anytime some helped traders on the ASX 200 and in the SPI respect the important support levels prices had been sitting on. That little bit of support was then bolstered by okay Chinese PMI data and a pretty solid SOTU such that both the ASX and SPI have had considerable and very strong bounces from support.

• Folks that’s why I always rabbit on about my McKenna Mantra. Trendlines are the bomb. They are the easiest thing to see on a chart besides a one or two candle set up and it’s clear that both algos and human traders watch them closely. Just look at the Bitcoin support recently from the trendline back to the September low, or what’s happened to oil since it broke its recent uptrend. Anyway I digress, I was talking about local stocks and their very solid bounce yesterday. Trendlines matter and this one in the SPI is a doozy. If, when, it breaks, there is about 100-150 of falls in it for the market. Here’s the SPI.

• The Aussie dollar has had a volatile past 24 hours. It fell into the low 0.8050 region from around 81 cents after the lower than expected inflation print yesterday. At 1.9% and with the structure of inflation so bifurcated, there is little pressure on the RBA to hike rates anytime soon. But the Aussie found some decent support and rose back to a high of 0.8116 overnight before it collapsed again over the past 6 hours or so. At 0.8049 now it is breaking down and out of the uptrend channel it has been in since the rally began last year around 75 cents.

Forex

• The battle over the US dollar continues. There has been quite a bit of tooing and froing within a tight range since the FOMC statement this morning. Euro is both well off its high for the night and low since the FOMC having traded a 90 point range in the past 4-6 hours. Key here is the continuation of cognitive dissonance among traders and investors who are still focussed on the positives of the Euro, not looking at negatives like inflation and Couere’s comments last night, and who are not really acknowledging the strengths of the US economy. It’s one-way traffic to aa certain extent and as I’ve written often wew do see this in currency markets all the time.

• There is no point fighting it because that would be trying to fight price action which is always dangerous. But I can be alert to a shift in the strength of the commitment to the universal US weakness trade. For me the first sign of that will be via a correlation breakdown. Recently I’ve highlighted the strength of the correlations between the major currencies and major commodities like oil and gold. If those correlations start to weaken from their universally high levels – ranging from 0.88 for the CAD/EUR to 0.98 for AUD/EUR over the last 35 trading days – then we’ll have a clue that perhaps the US dollar is turning. The question for me this morning is whether the yen’s move back above 109 is the start of that.

• Which brings me to the forex chart of the day, which just has to be USD/JPY as it tries to hold the bottom of the range its – mostly – been in for over a year now. This one clearly fits the McKenna Mantra of respecting a trendline and level unless or until it breaks. We did have a mild headfake last years with a run to the low 107’s before USD/JPY bottomed and then shot higher to the top of the range. The question is whether the range will hold again this time. BoJ action to buy more bonds, and thus keep 10 year JGB rates where it wants them, is aa sign that perhaps it should.

Commodities

• Buy the rumour, sell the fact. It’s as old a trading axiom as I can think of. And it may be what we saw in oil markets over the past week as traders anticipated the big build we saw in US inventories data last night by selling in front of the announcement. That saiad though the bounce in oil, with WTI up 0.5% to $64.84, and Brent up 0.63% to $69.06, belies the fact that the build of 6.776 million barrels was so much larger than the 126 thousand the Reuters poll had suggested. That and another increase in production as the US closes in on 10 million a day (although other government data did show the US eclipsed that number in November) could easily have knocked oil substantially lower. Buy the rumour, sell the fact?

• Turning to gold now and it looks biased lower but has had an amazing couple of hours selling down to $1332 before then bouncing more than $10 in the space of less than 15 minutes. That has it back testing the bottom of the trendline it broke out of two days ago. Frankly I have no idea what drove the bounce other than it happened off the mid Bollinger Band. Here’s the chart.

Have a great day's trading.