US Dollar Finds Support Despite Weaker Than Expected Jobs Data

Originally published by AxiTrader

Market Summary

US markets ended the first week of 2018 with fresh record highs as the big three indexes all made further strong gains after the US employment report was a little weaker than expected (+148,000, 4.1% UE, earnings +0.3%) but not weak enough to threaten the outlook.

The S&P 500 was 0.7% higher at 2743, the Dow rose another 0.88% to 25,295, and the Nasdaq 100 rose 1.04%. 2%+ in the first week is a great start to the year and while it has some folks worried about stock frothiness there is little appetite to sell right now it seems.

And naturally a frothy US market is dragging along other bourses across the globe. Europe main exchanges were all 1% higher but in the UK the FTSE lagged with a gain of just 0.37%. Asia was mixed but most positive and on Friday night SPI traders added another 18 points to the days very solild rally and close for the ASX 200 at 6122.

On forex markets the US dollar was under a little pressure but traders didn’t take the chance to belt the buck lower on Friday. The euro failed again at the 2017 high and is back at 1.2020, the pound is at 1.3558, and USD/JPY (moving inversely still) is at 113.06. On the commodity bloc the Aussie is still defying the drift in copper prices and sits at 0.7859 this morning while the kiwi is at 0.7149. But it was the Canadian dollar which was the standout after the Canadian employment crushed expectations with a print of 78,600 while the unemployment rate fell to 5.7% - a 40 year low. USD/CAD is opening the week this morning at 1.2413.

On commodity markets copper is still drifting and currently sits at $3.2295. Gold is off its high at $1319, while oil pulled back from last weeks highs with WTI ending the week at $61.44.

Looking at the day ahead we have the AiGroup performance of construction index here in Australia before German factory orders , EU consumer and business confidence, before the BoC business outlook.

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

International

• US non-farms undershot on the headline gain of 148,000 but there was better news on wages which rose 0.3% during December. That lifted the yearly wage growth rate from 2.4% to 2.5% while the unemployment rate stayed at 4.1%. The 148,000 gain was well below the market’s estimate of 190,000 but mitigated somewhat by the fact that there is some recognition that after so many years of growth and with more than 16 million jobs created during this expansion the ability of the US economy to continue to print numbers near or north of 200,000 is limited. Indeed a run of smaller numbers could be an indicator of real tightness in the labour market which might finally be the spark of a generalised push higher in wages, and in turn, inflation. Time will tell.

• Fed speakers aplenty over Friday and over the weekend with the continuing public debate between the doves and the hawks in full view. That the fed is sending mixed signals was neatly summarised By Pedro da Costa over at Business Insider who pointed out the concerns about inflation – its absence – that are gripping Fed policy makers. He also noted the conversation about the flattening yield curve. That’s essentially the debate with Patrick Harker and James Bullard saying Friday that the Fed could afford to be patient with Harker specifically suggesting the fed could run the economy a little hot and wait for inflation to pick up. That’s not the consensus view of the dot plot however and San Francisco’s John Williams said he thought the 3 hikes suggested by the plot was about right given where the economy is and even with unemployment falling to 3.7%. But Cleveland Fed President Loretta Mester was more hawkish suggesting 4 hikes noting – after the jobs data – that the US “economic expansion is firmly in place, labor markets are strong, and I expect that inflation, which has been running under our goal for quite some time, will return to our 2 percent goal on a sustained basis over time”. I’m with Mester.

• And the White House joined in on the rate hike debate with chief economist Kevin Hassett saying the Administration’s modelling of the impact of the tax cuts on the US economy “aren’t inconsistent with the Fed’s current guidance”. Which of course is 3 hikes. Which of course are still not priced by Fed funds traders.

• In Europe Bundesbank President Jens Weidmann was out talking up an end to the ECB’s QE program in an interview with El Mundo over the weekend. Weidmann said, “the prospects for the evolution of prices correspond to a return of inflation to a level sufficient to maintain the stability of prices.” As a result, he wants a “clear end to the buying of debt bonds by establishing a concrete date (for ending the program).

• US dollar repatriation watch: CNBC reports the GBH insights says tech companies will bring home $400 billion in cash as a result of the cheaper repatriation tax that was part of the recent tax changes in the US. Interestingly it says the money won’t flow into buybacks but rather investment and capital returns.

• There is a growing feeling that US stocks have entered the final stage of this great bull market. That’s certainly a view that seems to be starting to gain traction. But even as traders and investors worry we are in the “frothy” stage of the rally there is still some reluctance to call a top. That makes sense given the strength of the US and global economy and the impetus from the tax cuts. It’s also the case because of the potential positive income on stocks and the economy from repatriation. But sometime in the next few months all the good news will be priced in. John Authers has an interesting article at the FT which is worth a read on this topic. But his view is against a positive backdrop for the economy as he highlights in the opening paragraph “Unless the economic data cruelly mislead us, the world economy has reached a point where it can grow in a strong and co-ordinated way. The data admit little other interpretation (even if US job growth is slowing as full employment nears). The world has not looked so well poised for growth in at least a decade”.

• And here’s a tweet from Charles Schwab’s chief investment strategist highlighting the bullishness.

Source: Twitter Screenshot

• Remember the hand-wringing over Chinese Forex reserves last year? Yep, just when we had peak pessimism on the Chinese economy, capital flows, and the Yuan things turned around and China surprised the bears by both growing more strongly than they expected and by also getting control of its capital account. Seriously I always wondered why the bears thought there would be any other outcome. Anyway, fast forward year and data released over the weekend showed China’s foreign exchange reserves increased again to $3.14 trillion. That’s the 11th monthly increase in a row.

Source: Bloomberg

• Oh, and before I go. In Donald Trump watch, the President Tweeted he was a genius over the weekend. Gave a rambling press conference at Camp David talking himself up and taking aim at the new book by Michael Wolff and having a pop at former adviser “messy” Steve Bannon. On that latter point, messy Steve is now grovelling Steve it seems after he issued an apology to Axios over the weekend. You can read more about the apology here. But, if I may, I simply want to say the book adds nothing in real terms to the debate. I’m coming at this from a behavioural perspective and even without reading it yet it’s clear that we have confirmation bias writ large here. For the Trump haters, it confirms everything they thought about the President. For the Trump lovers, it confirms the media is out to get him. The President’s response then further reinforces both notions. Does it matter for markets? Yes. I think it does because for mine it is likely to reinvigorate the President in his next push toward infrastructure.

Australia

• It should be another solid day on the local market today with SPI traders adding another 18 points after Friday’s strong surge. The close above 6100 was the first benchmark for the local index to beat in a technical and psychological sense. So we’ll give the market a tick on that basis. Throw in the positive global backdrop – even if folks think this is a meltup – and the ASX200 should continue to benefit.

• But we need to be a little cautious because if thee US dollar turns around, or even stops falling for a time, that could further impact industrial metals prices which struggled last week. Copper in particular is drifting lower. That’s important for the Aussie dollar. But it may also be the harbinger of some further weakness in the complex. Something to watch.

• Looking at the SPI chart the break is clear. I have 6,300 pencilled in as a medium-term target but at the moment the key level I’m watching is 6081. While it holds the bias is higher. If it breaks we may see a deeper retracement.

Forex

• US dollar bears had ample opportunity to belt the buck Friday yet the euro still held below – yes just – the 2017 high. That could be the first sign that after a strong surge into years end the bulls might be a little tired and a pullback could be in the offing. I’m reluctant to get too excited just yet given that a trend which emerged in late 2017 was of dollar strength Friday evaporating on Monday once Europe and the US re-entered the fray for the new week. But the run lower higher for the euro has been steep and relatively fast and also stalled just under last year’s highs. So I’m on reversal watch for the euro, and many other currencies.

• The Canadian dollar is on fire again after a cracking beat in employment for December. USD/CAD traded down to a low of 1.2355 on Friday night before it bounced a little to sit at 1.2413 this morning in early Asia trade. It’s oversold based on the stochastic indicator but this can persist while fresh lows are still made. So USD/CAD could make further lows. That’s especially the case given that bets the BoC will hike rates this week have increased. Remember governor Poloz said late last year – before the bumper jobs report – that being wary about the outlook didn’t mean doing nothing. It might be that USD/CAD is headed for a full round-trip toward last year’s lows. Here’s the chart:

• But for mine the key forex theme this week is going to be the ability, or not as may be the case, of the USD to find it’s feet. Euro, Aussie and many other pairs are near important levels.

Commodities

• The narratives you’ll read today about oil are that prices were buoyed by the draw in inventories last week. And that is true but it is also the case now that there are some concerns emerging about the stickability of this rally in oil at the moment. Certainly, Friday’s move lower in WTI despite the small fall of 5 rigs to 742 reported by Baker Hughes is a sign that the $62.00/55 region which was consolidation in 2015 is still being eyed cautiously by traders.

• Indeed as noted there are a few traders now talking about oil having got ahead of itself even though the big draws in inventory seem to support prices. One of the key things they sight is the continued increase in net speculative positions as the number of shorts falls materially. It doesn’t guarantee a collapse. But it is certainly a risk factor. For the moment though the uptrend remains firmly intact – worth noting though WTI is toward the top of the range.

• Copper is still slipping and closed the week at $3.2295. I have a move toward $3.17 pencilled in a garden variety retracement/consolidation of the recent really solid run higher.

• Gold will go where the US dollar goes this week. It’s at $1319 this morning off a high last week of $1325/26. It’s rally has been sharp and fast, and highly related to the USD’s fall. The forst signs that, like copper, it is ready for a retracement/consolidation are now in place.

Have a great day's trading.