Originally published by AxiTrader
Key Takeaway
The USA dollar is ripping through forex markets, particularly against the Australian and New Zealand dollars which have collapsed more than 1% in the past 24 hours as additional signals from Fed governors Lael Brainard and Jerome Powell both signalled that March is more than live for a rate cut – it’s almost a lock.
That’s also seen the euro, sterling, Swiss franc, and yen under pressure in various degrees.
It’s also put downward pressure on gold which has broken support as well as weighing a little on some base metal prices. Crude oil is lower as a failure to break higher and record inventory stock levels in the US, and Russian production cut recalcitrance all weighed.
Bonds are naturally higher also with the US 2-year the highest level since 2009 while stocks are a little bit weaker at the moment. They haven’t given up yesterday’s gains. But the S&P 500 has pulled up at the level we’ve been watching.
All eyes now on Fed chair Janet Yellen and her deputy Stanley Fischer both of who speak tonight.
What You Need To Know (with a little more detail and a few charts)
- S&P 500 -8 (0.35%) 2387 (7.06 am Sydney)
- Dow Jones Industrial Average -56 (0.27%) 21058
- Nasdaq 100 -29 (0.49%) 5,875
- SPI 200 -18 (0.3%) 5,745
- AUD/USD 0.7568 -1.4%
- Gold $1234 -1.17%
- WTI Oil $52.63 -2.2%
International
- US stocks aren’t down too far this morning. But it’s worth noting that the S&P 500 does appear to be respecting the overhead resistance from the old support line that goes back to the start of the 2011 – 2015 rally. It’s just one day so far but it is a level that for me is a good place for the market’s rally to pause and consolidate.
- I wrote a week or two back that Janet Yellen is mostly referred to as a dove but that I felt that’s because the US economy needed her to be a dove. Now that the outlook for the economy has improved what the US economy needs is a different Janet Yellen, less dovish, and I felt that is what we were seeing and would see. I expect this change to be reflected in her speech tonight.
- That change is also something we are seeing across the Fedspeaker universe. That’s something I’ve been writing about for a while now and its something that has become apparent to traders this week as the odds of a Fed hike at this month’s meeting have been repriced from around 25% last week to just below 80% according to the CME FedWatch tool this morning.
- This last surge of close to 10 percentage points from yesterday comes after noted dove Fed Lael Brainard joined the rate hike chorus yesterday. Brainard said the US economy was closing in on full employment, inflation was moving toward the Fed’s target, foreign growth was on a more solid footing, and the risks to the outlook are as close to balanced as they have been for some time. The result was it is likely to be “appropriate soon to remove additional accommodation”. What I also thought was interesting was that Brainard – like St Louis Fed president James Bullard the day before – put a discussion of the wind down of the Fed’s balance sheet on the table.
- The US dollar went bid in Asia when these comments hit the airways and it continued overnight with Fed governor Jerome Powell saying that “the case for a rate increase in March has come together”. IT’s really only a disaster of a non-farm payrolls release next Friday that would seem to be able to derail the Fed’s March toward a rate hike.
- Hence the increased odds priced into the market.
- And the prospects of weak non-farms seems remote if jobless claims in the US are any indication. Data released last night showed jobless claims fell an amazing 19,000 to a seasonally adjusted 223,000 for the week ended February 25. That’s the lowest since March 1973 and fairly screams tight labour market. That’s something the Fed’s Beige Book highlighted yesterday morning.
- Besides the US dollar rates in the US and across the globe are higher as a result. At 1.33% the US 2-year note is at the highest level since 2009. US 10’s are still relatively benign hanging just below 2.5%. But a curve flattener makes sense when you think that the Fed is trying to signal that if it hikes rates now it will need less rate rises and a smoother path of rate increases because the economy won’t then get away from it. SO while 10’s are probably still biased higher and active Fed trying to get ahead of the curve - noting of course the Atlanta Fed’s Taylor rule tool says rates should be 3% - seems to be giving the bond vigilantes some comfort. How long can it last though?
- Rates are higher in Germany as well overnight as EU inflation data showed a rise to 2% for the 27 nation bloc. That’s the ECB’s target folks and it comes a day after inflation data in Germany shows prices lifted to a 2.2% year on year rate of growth in Europe’s largest economy.
Australia
- The OECD is giving a pretty dark warning about the outlook for the Australian economy on the back of housing and other risks. I couldn’t agree more with them. And while I’ll note before someone writes me that its always easy to call a top in the housing market yet we haven’t seen one this last phase of Sydney house price appreciation if you could see it on a chart would give even the most casual observer pause.
- Indeed if I could short the market around now I probably would such is the vertical nature of the last 12 months price appreciation. Actually buying puts is probably safer because timing a bubble pop is difficult.
- The AFR reports this morning that the OECD said the housing market may not "ease gently" and could develop into a "rout on prices and demand with significant macroeconoimc implications".
- Hard to disagree with that. Just look at the break up of the GDP data for the fourth quarter of 2016. Consumption was the largest contributor to growth even though wages are low because households were happy to lower their savings rate. Will that continue given debt levels if house prices flatten out. I doubt it. So the economy is vulnerable when, I guess if, property prices stop rising.
- Indeed it is worth noting that it’s not just the OECD warning about the outlook for the Australian economy. Westpac’s chief economist Bill Evans yesterday joined the NAB’s chief economist Alan Oster in highlighting his worries about the economy in 2018.
- But that’s a warning and for another day I guess an a little too esoteric for traders right here and now.
- Looking at the SPI 200 today traders have marked it down around 12 points from where it was yesterday afternoon. With the sectors driving the weakness in the S&P 500 overnight the dominant sectors on our market there may be more scope for week’s end position squaring before Janet Yellen speaks tonight in local trade today.
- Looking at the chart yesterday’s high was below the previous two highs – even as the Dow and S&P make new records. So unless or until the SPI can get up and out of the 5767/89 zone it remains trapped.
Forex
- The Australian dollar has collapsed overnight losing 1.4% since 9am yesterday morning to sit at 0.7560. The Fed comments and a disappointing trade surplus weighed. But it seems that traders having been unable to push through resistance above 77 cents decided to test support. I know that sounds like a trite explanation but that’s how prices work (see oil overnight as well).
- I tweeted yesterday at o.7646 the Aussie looked tired and my system was already short. So it’s no real surprise the Aussie is lower this morning. Traders and investors are looking at the same charts I am and we all are and a rounding top like the one above is often the precursor of a move lower. I’ll have more to say later in my Aussie specific piece. AUDUSD is at 0.7558 now.
- The Kiwi is lower as well as both it and the Aussie played catch up with the weakness we’ve been seeing in the CAD lately. At 0.7052 the Kiwi has lost 1.3%.
- Elsewhere in forex land the US dollar in index terms is up above 102. That’s the break higher after the consolidation I’ve been watching and writing about. The dollar’s ability to hold 99.20/50 set up this move higher. Certainly it’s been fed by the Fed but the trend to dollar strength seems to be re-emerging.
- Euro is down below 1.05 as a result at 1.0495, the Yen is in the mid 114.50’s looking like it could run substantially higher, GBP is down – but not to much at 1.2250. Reuters latest poll show traders have a fairly sanguine – if negative – view of the pound seeing it only drop around 2% this year.
Commodities (more meat on the bones in the published report)
- Crude has lost more than 2% overnight as traders refocussed on that record inventory stockpile I highlighted yesterday and the release of official data which showed a lacklustre production cut from Russia. That’s also something I highlighted but the data overnight was official data.
- So this morning we have WTI off 2.2% to $52.65 while Brent is down 2.16% to $55.14. Crude is very vulnerable based on technical and positioning at the moment.
- That makes Russian oil minister Novak’s comments last night that it’s too early to talk about an extension to the production freeze important when US shale oil is coming back with gusto.
- Gold is under the trendlines I highlighted earlier this week and looking biased back to the $1219/20 region. If stocks are running into headwinds I won’t get too bearish gold. But a break is a break. It’s at $1231 this morning
- Speaking of break copper fell 1.72% last night. Intriguing price action.
Today's key data and events (all times AEDT)
- Australia - AiG Performance of Services Index (Jan) (9.30am)
- New Zealand - ANZ Commodity Price (Feb) (11am); RBNZ Assistant Governor McDermott Speech (11.30am)
- China - Caixin China Services PMI (Feb) (12.45pm)
- Japan - Tokyo CPI ex Fresh Food (YoY) (Feb), Tokyo CPI ex Food, Energy (YoY) (Feb), Tokyo Consumer Price Index (YoY) (Feb), National Consumer Price Index (YoY) (Jan), National CPI Ex-Fresh Food (YoY) (Jan), National CPI Ex Food, Energy (YoY) (Jan), Jobs/applicants ratio (Jan), Unemployment Rate (Jan), Overall Household Spending (YoY) (Jan) (10.30am); Markit Services PMI (Feb) (11.30am); Consumer Confidence Index (Feb) (4pm)
- Germany - Markit Services PMI (Feb), Markit PMI Composite (Feb) (7.55pm)
- EU - Markit Services PMI (Feb), Markit PMI Composite (Feb) (8pm); Retail Sales (MoM) (Jan), Retail Sales (YoY) (Jan) (9pm)
- UK - Markit Services PMI (Feb) (8.30pm)
- Canada - Nil
- US - Markit Services PMI (Feb), Markit PMI Composite (Feb) (1.45am); ISM Non-Manufacturing PMI (Feb) (2am); Fed's Evans Speech, Fed's Lacker speech (2.15am); FOMC Member Powell Speech (3.15am); Fed's Stanley Fischer speech (4am); Baker Hughes US Oil Rig Count, Fed's Yellen Speech (5am); CFTC Gold NC net positions, CFTC USD NC net positions, CFTC Oil NC net positions (7.30am)
Have a great day's trading.