Originally published by AxiTrader
Market Summary (7.44 am)
The US dollar is weak again with the yen pushing USD/JPY down below 108 to just a dozen points above the 2017 low of 107.30 overnight. It’s bounced a little, but that yen strength ignited moves in the euro and other currencies against the US dollar such that the US Dollar Index has fallen a little more than half a percent to 89.67.
Recovery aborted.
Of course that might change this evening if US January CPI is higher than forecast. But there is equally every chance that it’s too late by then given we’ll have already seen the release of German inflation and GDP data along with Euro Area GDP.
And on that front UK inflation data was higher than expected which has helped sterling rally back toward 1.39. The Australian dollar, on the other hand, is down slightly at 0.7854 underperforming the US dollar weakness induced strength in copper, base metals, gold, and iron ore – not to mention the solid NAB business survey. AUD/USD is sitting around 0.7858 this morning.
Turning to stocks now and it was a poor night in Europe after Asia’s positivity yesterday. US futures had been down earlier so it’s no surprise the DAX dipped 0.7% or that the CAC 40 fell 0.6%. The FTSE however was more circumspect dipping just 0.2%. At present in the US the big three indexes are in the green with between 0.1% for the Dow Jones Industrial Average and 0.55% for the Nasdaq. At 2666 the S&P 500 is well off the low of the day at 2,637 and sitting just above the 38.2% retracement of the fall from the record highs to last Friday’s nadir. .
On other markets US 10's are at 2.84%, the 2's are at 2.10% and the curve has thus dipped a little to 73 points. There is much anticipation for the release of the aforementioned US CPI for January tonight as a scene setter and confirmation or denial of the market spook the wages data in the US jobs numbers caused earlier this month.
Looking at commodities and it has been a pretty good night for base metals with copper leading the way higher with a 2.45% move. That along with the 0.34% move in gold up to $1327, and the pre-holiday climb in iron ore futures should be supportive of the Aussie dollar. Note I say 'should'. But, I digress. Oil is holding in despite the IEA report saying US production is more than covering the increased global demand. WTI is down just 0.1% at $59.22 while Brent sits at $62.4, up 0.2%.
On the day today we get the release of the latest Westpac Melbourne Institute Consumer Sentiment survey here in Australia. I’ll be particularly interested in the headline but also the unemployment expectations sub-index.
After that, the data gets BIG real quick. Japanese Q4 GDP is out, then Singapore’s data, and of course tonight we get German inflation data for January and Q4 GDP. We also get the release of EU industrial production and GDP growth data as well. Then, of course, it’s US Jan CPI to confirm or deny the bond markets fears. The risk seems asymmetric to me. Even a slightly higher number than the 1.7% expected for core and 1.9% for headline could set the cat among the pigeons given the late cycle stimulus the Trump Administration is pumping into the US economy.
Here's What I Picked Up (with a little more detail and a few charts)
International
- Was it an off the cuff remark or is Donald Trump genuinely signalling that the US is going to increase tariffs on imports into the United States? I ask that this morning as the kerfuffle around what appeared to be an off the cuff remark Monday grows. “We’re going to be doing very much a reciprocal tax, and you’ll be hearing about that during the week and during the coming months,” Trump said. Administration officials told Reuters there “is nothing formal in the works right now”. But when Germany’s economy ministry say “we have taken note of the announcement by President Trump and are closely watching further developments,” you know there is a kernel there that could grow into something. Indeed Germany’s BDI industry association the US is causing a “dangerous spiral” if President Trump’s plan gains traction. Trade wars are on the agenda again it seems.
- New Fed chair Jerome Powell reiterated the Fed’s path last night. He said, “we are in the process of gradually normalizing both interest rate policy and our balance sheet”. But he also said, “we will remain alert to any developing risks to financial stability”. I guess that is with respect to recent volatility but it could also be a comment about the late cycle fiscal stimulus that the Trump Administration is pumping into the US economy. On the topic of fiscal largesse Powell’s colleague Cleveland Fed president Loretta Mester said “there is more salient upside risk to the forecast than we have seen in quite a while”. In a clear signal the fed may need to recalibrate upwards the path of interest rates Mester added “we have to see a little bit more detail on exactly how that is going to play out”. Indeed we will. Whatever the outcome of tonight’s US CPI report – good or bad for bonds – the outlook is for higher US bond and interest rates.
- So, you won’t be surprised to know that as a result of all this stimulus and positive expectation for US growth Small Business optimism in the US is high. Last night’s release of the NFIB business optimism index printed 106.9 from 104.9 last. Here’s the chart via this Bloomberg story.
Australia
- If wages and or inflation start to lift then the RBA is going to have to calibrate its still slightly pessimistic outlook for households. And in doing that it is going to have to recalibrate the message the bank has been sending on interest rates recently. I say that after another stonkingly solid NAB business survey was released yesterday showing once again that confidence, conditions, trading, profitability, and employment are all looking very healthy.
- Business conditions at 19 are 12 points above the long run average for goodness sake. So despite Assistant Governor Luci Ellis’ somewhat circumspect speech yesterday on the outlook for the economy yesterday there is growing evidence that as the business sector retains strength so then can wages in the economy start to rise. Many of the of the charts Ellis had in her presentation yesterday I was also using in Melbourne. But where we differ is that I have a little more confidence that wages will start to increase later this year – fingers crossed! You can read Ellis speech here and below is a chart from the NAB’s quarterly survey last week via Business Insider that shows the relationship between business and unemployment. As it falls, and as underemployment falls we can expect wages to start to rise with about a 6 month lag.
- Turning to the SPI now and the rally over the past 24 hours has taken prices above the 38.2% level of the fall at 5,781 which was also roughly the range top of last years consolidation range. So that is good news. 5,836 is the next target for the SPI now which would imply the 5,890 region for the S&P/ASX 200 physical as a big resistance.
Forex
- The US dollar can not take a trick. It’s possible to say that the moves in gold, in the yen, euro and Swissie are all about safe haven. But I don’t see it that way. I see it as an anti US dollar move as traders and investors fret about the twin deficits and as the move higher in US bonds threatens to become a capital destruction event not the buying opportunity each sell has been over recent years. That’s a bit of a game changer for investors approach to US assets. It means that rates can rise materially and the US dollar get no comfort whatsoever.
- I don’t want to over-egg it though. The problem with writing a long and involved daily each day is that sometimes you can over extrapolate a one or two day move into something more structural. I’ll save my verdict giving till I see the inflation data in Germany and the US tonight and then see how prices react.
- But from a pure price action point of view USD/JPY is at risk of a very big break. As usual my mantra is to respect trendlines unless or until they break. But price is approaching a critical juncture. A weekly close below 107 would signal a big move lower.
Commodities
- US production is back above 10 million barrels a day for the first time since the 1970’s. And it is the pace of the uplift in that production which has the Paris based IEA saying that supply may still outpace the increase in global demand for oil.
- The IEA increased its demand forecast by 7.7% but said “U.S. producers are enjoying a second wave of growth so extraordinary that in 2018 their increase in liquids production could equal global demand growth”. Indeed the IEA says US production will move through 11 million barrels a day by late 2018.
- The wash up hasn’t been a big change in the price of oil overnight. Brent fell back to last week’s low and before recovering a little while WTI is just holding above the 38.2% retracement level of the rally since August 2017. $58.00 now looms large as a key support/break level for WTI. Here’s the chart.
Have a great day's trading.