US CPI And Retail Sales Undermine Notions Of Fed Hikes

Originally published by AxiTrader

Market Summary

US stocks bounced back last night (S&P 500 +0.86%, and Dow Jones Industrial Average +0.9%) after weaker than expected retail sales and CPI Friday reduced the chances of aggressive Fed rate hikes. I’m not sure I agree on that given the Q1 weak GDP wouldn’t exactly be unexpected in the Eccles Building.

But hey, the market and price action, is what’s relevant.

That means the ASX could have a resurgence of the bulls who proved a little frail before Easter. While the better tone the US stock market surge gives investor risk appetite a lift which will help the Aussie dollar, hurt the yen and gold.

What You Need To Know (with a little more detail and a few charts)

• S&P 500 +20 (0.86%) 2349 (7.15 Sydney)
• Dow Jones Industrial Average +183 (0.9%) 20636
• Nasdaq 100 +52 (0.89%) 5,856
• SPI 200 5,852
• AUD/USD 0.7589 +0.81%
• Gold $1284 -0.02%
• WTI Oil $52.75 -0.81%

International

• Ahem, attention Trumponomics, Traumpflation stock market bulls. US Treasury Secretary Steve Mnuchin has fessed up that the chance of getting tax cuts through by his previous August estimate is “highly aggressive to not realistic at this point”. What’s telling about this for stocks is that hopes of a 2018 impact on stocks – which helped fuel the rally – now will need to be pushed back. So if the data slips in the US and around the globe – as it has recently – then the chances of a continuation of the recent downtrend in the S&P 500 are high.

• As noted above stocks in the US lifted last night – no doubt as folks scale back expectations of Fed rate hikes – but this overall down drift endures. Here’s the chart.

• Given the weaker than expected March CPI (2.4% yoy v 2.6% exp) and retail sales (-0.2% v -0.1%) expectations of the print for Q1 GDP in the US when it released on the 28th of April were lowered again. The Atlanta Fed index has been downgraded to just 0.5% annualised (that’s almost no growth in the quarter when you deconstruct it) while the NYC Fed’s estimate still says a little more than 2% but itself has been downgraded about half a per cent recently.

• And As I wrote last week, the rally in US interest rate markets is a warning for stocks here in Austr5alia and around the globe. Last night the 2’s and 10’s drifted a little higher with stocks in thin holiday trade – the 2 year treasury is at 1.20% while the 10 year is at 2.25%. I’ll be watching 10 years closely to see how all this ties together over coming days and weeks.

• The French election is really tightening up as we head towards the run-off election this weekend. The latest polls still show that Marin Le Pen and Emmanuel Macron are the front runners. But both Francois Fillon and Jean-Luc Melenchon are still in the race just a few per centage points behind. That makes this first round of voting this weekend too close to call realistically. That is a huge risk for the euro, forex markets more broadly, and financial markets globally.

• After last week’s solid trade data China’s Q1 GDP, released yesterday, showed the year on year rate of 6.9%. That’s a little stronger than the 6.8% growth rate pundits had forecast and showed that growth is once again resting on the old drivers of steel and stimulus. Yesterday’s release of retail sales for February at +10.9% and industrial production +7.6% both beat expectations. It is my fervent belief Chinese authorities will do their darnedest to keep growth as strong as possible in 2017. It’s just too important a year for the president and Chinese politics.

• Speaking of China a couple of other important things popped up in the past couple of days. Reuters reported an adviser to the4 PBOC said China’s RRR for banks could be cut because overall reserves in the system had fallen as a result of FX outflows. Separately Liu Shiyu, chairman of the China Securities Regulatory Commission (CSRC) knocked China’s stock markets for six yesterday with his comments that there needs to be a crackdown on speculation. Reuteres reported Liu said “(We) must further liberate thinking and have the courage to brandish the sword, and defend legal oversight authority ... to resolutely combat behaviour that disturbs market order and in no way be lenient". The Shanghai Composite ended the day 0.75% lower at 3221.

• In Japan BOJ Deputy Governor Hiroshi Nakaso, floated the idea of how the BoJ might exit stimulus and the discussion the bank is having at the moment on that topic. He noted at the present time it is still appropriate for the BoJ to be focusing on the stimulus itself. But it’s clear – discounting the RBA – the globes central bankers are thinking about exiting global monetary accommodation.

• I haven’t forgotten the Korean Peninsula, or the sabre rattling. Nor have I forgotten the failed test over the weekend by the North Koreans of a ICBM. Pyongyang is getting more belligerent and US vice-president Pence warned North Korea the “era of strategic patience is over”. So yesterday we saw USDJPY hits it’s lowest level in month before stabilising. But this remains a potential flashy point.

• Likewise so does Turkey. Even though president Recep Tayyip Erdogan won his referendum - to change the Turkish system of government to an Executive branch style and do away with the role of prime minister thus centralising power in the presidency – it was a very close margin and European vote monitors have questioned it. Clearly though – based on his actions before the vote – he doesn’t care what Europe says. Turkey looks like its heading towards the Egyptian model of government.

Australia

• The RBA minutes today are going to be of great interest to me and many traders. We’ll be looking for hints about monetary policy and a little deeper insight into their thinking on the economy. I say that because there were clear concerns that seemed to emanate from the governor’s statement two Tuesday’s ago – and not just about housing. Rather the outlook for the overall level of growth in the economy, and thus an impact on monetary policy setting, seemed a little down beat.

• Traders on the ASX though will be looking toward the big rally in the US as perhaps a better guide to what they will be doing.

• Sectorially it’s a bit mixed, gold and oil are down, but financials lead the US market higher with that sector gaining more than 1.15% as measured by S&P 500 financials.
• It will be an interesting test for the bulls who have dominated ASX trade of late.

Forex

• The US dollar is under pressure but off its lows as the markets which were closed over easter return to the fray this morning. The tension on the Korean peninsula saw USD/JPY hit its lowest level since November 15 last year in the aftermath of the weaker US data and Pyongyang’s missile test over the weekend.

• USD/JPY is at 108.97 this morning after trading to a low of 108.13. The recovery has moved the price both back above the 200 day moving average and away from support at 107.86 – the 61.8% retracement level of the Trumponomics rally.

• Elsewhere EUR/USD is still clinging to the uptrend line from the 2016 low it’s at 1.0643. GBPUSD made a high just below 1.26 and is at 1.2563 as I write. 1.2615 is the big level for the pound.

• The Aussie was higher and back above 76 cents at one point over the past 24 hours.
  

• Worth noting also is that US Treasury Secretary Steve Mnuchin also clarified his bosses comments on the US dollar. The FT reports Mnuchin said "“The president was making a factual comment about the strength of the dollar in the short term . . . There’s a big difference between talk and action.”

Commodities

• WTI (-0.92% to $52.69) and Brent (-0.82% to $55.43) are retracing some of the recent strength that we have seen in oil markets recently. That’s understandable after a rally of more than $6.50 in such a short space of time. A move back toward the low $51 region on the technical wouldn’t be unusual – that’s just where the 38.2% retracement level of the recent move and important trendline sit.

• On the fundamentals front it’s worth noting that US rigs keep growing, the EIA has again upgraded production estimates from US shale, the Iranians said they favour an extension to the production cut deal, but the Saudi Oil minister says it’s still too early to make that commitment.

• Gold broke out of the very important monthly down trend - trading to a high of $1295 - but was unable to hold above that level and it’s back at $1284 this morning. The big rally in US stocks has helped shift the fear factor back a few notches hurting gold. Overall this is a big trendline being a monthly and likely tensions over Syria, or on the Korean Penisinsula, need to ratchet up a little further to see it sustainably break.

• Copper was up again and is back at $2.60 after an increase of more than 1% again yesterday. That takes it to just below the important trendline it broke below last week. So this retest is important for the medium term outlook. A resumption of the fall would send a strong signal to the chartists that copper has a big fall coming.

Have a great day's trading.