We Need To Talk About The Unjustified Focus On Fed Doves And ECB Hawks

Originally published by AxiTrader

Market Summary

Stocks in the US bounced back today with credit in many places given to comments from uber-Dove James Bullard saying, well, dovish things about the outlook for rates. That and the US 10's dipping a little to 2.92% anyway.

I’d rather say the fact the 10’s didn’t keep selling off is the key here. Bullard is an outsider on the Fed consensus and on that front US data was strong last night.

So as I write with 40 minutes to go before the close the S&P 500 has now slipped back to be up 0.1% on the day at 2,702 – the candlesticks of the past few days look awful. The Dow is up 0.8% and the Nasdaq is now flat%. Europe was mixed to down with the FTSE off 0.4%, the DAX down 0.1% and the CAC 0.1% higher.

Locally SPI traders are shooting for the stars earlier with a more than 50 point gain priced in on top of yesterday’s solid close at 5,950. But as the S&P has given back points so too have SPI traders who have added 33 points now. Still solid though. It’s worth highlighting on that basis that both the ASX 200 and SPI have shown a lot of resilience this week when there were plenty of opportunities to sell and stay down.

Also resilient is the Aussie dollar, which is up 0.6% at 0.7850 with the US dollar a little weaker. It’s not the best performer though with the yen 1% firmer against the buck as USDJPY trades back at 106.64. The euro is up 0.43% at 1.2335 after the ECB minutes were reported kinda hawkish but weren’t. The pound is up 0.32% at 1.3962 despite lower GDP and a downgrade to retail sales. The Canadian dollar is flat at 1.27 and the kiwi has gained a little under 0.4% to 0.7344.

On commodity markets an unexpected draw in US inventories and the US dollar move has sent prices higher by 1.4% and 1.6% for Brent and WTI, which are trading at $$62.71 and $66.33 respectively. Gold is back at $1330 and copper – along with base metals more broadly – is higher.

It’s quiet in Australia on the data front today while Japan has important inflation data. Tonight Euro Area inflation is out along with German GDP growth. Canadian inflation is also out and we have speeches from Dudley, Mester, and Williams – all very influential Fed voices.

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

International

The section below is a bit of a rant and explanation about what’s going on with the coverage of the hawks and the doves. I think it is important because it helps explain investor/trader actions, drives the headline-chasing algos, and hopefully will help us all better interpret market moves.

• We need to talk about the proclivity of the press, headline writers, and traders to focus on the doves at the Fed and the hawks at the ECB. It’s something I have noticed over recent months. Even though these two groups are – based on the actions and official statements of both central banks – losing the battle at the board table, they seem to be more vocal in public and because of that, or perhaps because it makes interesting copy or comment, they seem to garner more coverage than their minority positions should. This is not a complaint, just an observation. To me that feeds the headline reading algo’s and makes markets, forex in particular, more unstable than would usually be the case.

• Is it a reaction to our Facebook (NASDAQ:FB), Google (NASDAQ:GOOGL), Twitter (NYSE:TWTR), Snapchat (NYSE:SNAP) world where nothing matters but the last thing we saw or heard? I’m not sure. But I do know President Trump has been chided over being influenced into taking a position by the last person he talked to, yet that’s exactly what traders and markets are doing at the moment.

• Take last night’s comments from St Louis Fed president James Bullard. Hand’s up if you didn’t know Bullard is on the uber-dovish side of the hawk/dove divide. In fact Bullard is not just a dove, he’s an Olympic Opening Ceremony-level dove. Indeed Bullard said last night “the idea that we need to go 100 basis points in 2018, that seems like a lot to me. Everything would have to go just right. The economy would have to surprise on the upside a bunch of times during the year. I'm not sure that's a good way to think about 2018’. Ahem folks, his own colleagues on the FOMC – through the dot plot – were already suggesting three hikes before the tax cuts and the budget stimulus. So maybe the fourth hike might need things need to “go just right”. But “surprise a bunch of times”? Nope.

• Yet Bullard’s comments are cited in myriad reports this morning as a reason that US 10’s are back at 2.91%, why stocks are bid again, and why the dollar is a little weaker. I’ve had enough, I need to go and check Instagram. Okay, not really – but you know what I mean. And this comment by Bullard kind of makes my point. On tightening and financial conditions Bullard said, “"One thing I'm concerned about is if [there's] a bunch of hikes this year Fed policy will turn restrictive. The neutral fed funds rates is pretty low”. Perhaps he should get someone at his bank to aware him of the fabulous FRED database it runs. And it is from this source I offer you the following chart of US financial conditions – just coming off the lows for this century even though the FED has been tightening rates for a few years now.

Source: St Louis Fed FRED Database

• But I don’t see too many reference to Fed Governor Quarles saying the Fed’s articulated gradaual increase in terst rates seems “appropriate”. Anyway…

• And of course, it was the same story with the ECB minutes. Much commentary has focussed on the discussion around guidance and the hawks even though they are losing the battle presently – the Bloomy headline was “ECB keeps guidance change on the radar for first half of 2018”. The focus is less on the actual actions of the ECB maintaining words which say if things slow down they will ease again and the fact it is expressing real concerns about the euro’s rally. I know, I know, people feel changes not levels. So the status quo is never a good – or interesting story.

• Here’s what the minutes said, “Changes in communication were generally seen to be premature at this juncture…Monetary policy would continue to develop... with a view to avoiding abrupt or disorderly adjustments at a later stage.” The minutes also highlighted that “some members expressed a preference for dropping the easing bias... However, it was concluded that such an adjustment was premature and not yet justified by the stronger confidence”.

• My sense here is that markets are moving around on the noise, not the signal. That’s important folks. It’s where danger lies. That’s because all news in this paradigm is fresh and thus prone to be a surprise or shock. One good thing for this readership though. It helps explain why so many markets are charting so well right now – it’s the best roadmap in this time of inflection and uncertainty around global monetary policy and the removal of emergency stimulus put in place as a result of the financial crisis and where it led the global economy and markets.

• Right, now that I have that off my chest, US data last night was strong. Jobless claims remain low, continuing claims likewise, and the Conference Board reported that its leading indicator of US growth accelerated further in January up 1% from December’s 0.6% print. Reuters reported that the surge in the LEI reflected strong financial conditions, manufacturing, home building and labor markets and that Ataman Ozyildrium – the director of business cycle and growth research at the Conference Board – said it “continues to point to robust economic growth in the first half of 2018”.

• In Germany Ifo data was a little weaker than last month, with the current conditions dipping to 126.3 from 127.8 and expectations dropping to 105.4 from 108.3. Fair to say though an Ifo spokesman said this just reflects a change from Eurphoria of business but the economy is still humming. In the UK GDP was weaker than expected with the second read for Q4 2018 printing 0.4% from the 0.5% originally reported while the yoy rate slipped 0.15 to 1.4% to reflect this dip. Business investment was also downgraded to 0.0%. Separately the CBI said retail sales eased further in February. The print of +8 in the month was lower than January’s +12 reading and below the +13 Reuters poll.

• And while I’ve been typing a White House economic adviser has been talking. The summary is he says the administration has not changed the US dollar policy, believes growth can get to 3% without causing too much inflation, and that higher wages will attract folks back into the workforce. Oh, and the NY Fed dealer survey shows the median dealer is looking for 3 rate hikes this year.

Australia

• Gee whiz the S&P/ASX 200 has been solid this week. More so than I would have expected given all the chances that traders have had to knock it lower only to see it bounce back every time. You can’t argue with price action like that – well you can, but you’d be mad to. It sends a strong signal of underlying demand in the market. Perhaps the optimism is a misplaced belief that the worst is over for the US stock market and as such buying the dip here in Australia is a good move. Or perhaps its simply the case that for the most part earnings have been pretty good overall so far here in Australia. Either way the market has a bid tone.

• So it seems that we’ll have a very positive end to the week on the physical ASX 200 today. SPI traders have added a stonkingly solid 50 points overnight to the already quite strong close yesterday on the physical at 5950. So, 6,000 beckons today it seems. Looking at the SPI chart itself the key for me is that while – by the close yesterday morning – prices had drifted back into the 5,892/5,922 resistance zone at no point in trade did they slip below. So with this very solid bounce the chance of the SPI itself testing 6,000 sometime soon are growing. As long as US markets play ball of course. Here’s the chart:

• Looking at the Aussie dollar now and it has rallied around half a percent over the past 24 hours and is trading 0.7843 this morning. That’s a function of both the improved equity market and risk backdrop as well as the slightly weaker tone in the USD. The overnight high was 0.7858/60 which is a little resistance line on the short term – 4 hour – charts. So the battler would have to take that out to head higher. I’m not sure it can and am still focused on a move toward 0.7750 and ultimately 0.7615. But if 0.7860/65 gives way we could see a run back up to 0.7912 looking at the 4-hour charts.

Forex

• The US dollar has still done nothing but TRY to form a base in US Dollar Index terms. It’s been pretty successful in so far as we’ve had a double bottom above 88 and a nice bounce which saw it trade back over 90 yesterday in the wake of the FOMC meeting. But its back at 89.71 this morning having lost a little ground against the euro and a lot of ground against the much lower weighted yen. It’s encouraging for US dollar bulls but the downtrend is still clear. It’s something I simply want to highlight because it shows the strength of this trend. But it also shows that if policy divergence comes back into play and if EU data continues to print weaker than it expectations there is substantial room to rally.

Source: Investing.com

• And if you trade yen, the yen crosses, and Japanese markets it might be worth reading this article from Reuters on what the CIO of Nippon Life has to say It’s pretty insightful. Hint, he used the term “goldilocks” for stocks and likes USD/JPY under 105.

• For the moment when I look at the charts, my key takeaway is that USD/JPY failed to break back into the previous range and has turned lower once again. Notwithstanding what the man from Nippon said about liking USD/JPY below 105 the outlook has turned back toward a higher chance of a run down toward 103, 101.50, and maybe even 98.

Commodities

• Crude inventories didn’t rise as expected last week the EIA reported overnight. Instead, they fell 1.616 million barrels. Part of that is the shape of the oil curve which makes it uneconomic to store product. The result, of course, was higher prices for both WTI and Brent and it was a rally which was also aided by the weaker US dollar. So this morning WTI has bounced 1.6% to $62.70 while Brent is up 1.4% to $66.33.

• Charts and price action thus suggests I’m looking the wrong way on crude at present. As you can see in this Brent chart the MACD continues to trend back toward the zero line and Brent has bounced solidly on the back of the inventory and US dollar. I’m still focused on the $66.80 region. A break of that would open a big move higher. While below it Brent is not yet out of the woods.

Have a great day's trading.