Originally published by AxiTrader
Market Summary
It's been a volatile final two hours to US trade as the market first read the FOMC minutes as dovish before a re-interpretation saw US 10's push up to 2.95%. This buoyed the US dollar and sapped the strength of the stock market bulls who had earlier driven the Dow, S&P 500, and Nasdaq 100 up more than 1%.
With 20 minutes of trade left, whether US stocks end in the black or the red is still an open question. But for the moment the S&P 500 is up 0.20 at 2,721 after another failure to hold above the important resistance level around 2,740/45. The Dow is essentially flat at 24,980, and the Nasdaq is up 0.6% at 6,817 a
The US dollar is a little stronger on the day after recovering substantially and pushing hard after the release of the FOMC minutes saw the initial dovish read place it under pressure.
The 5-year treasury auction went off reasonably well overnight but US 10’s are a couple of points higher now in post minutes trade at 2.95%.
My sense is that the minutes were even handed and reflected differing views. The Fed will simply be – like the rest of us – waiting to see if the data continues to strengthen and wages rise as economic expansion and stimulus combine. I believe we’ll see enduring strength in the US, as do some on the FOMC. I see 4 hikes in 2018. But there are many others yet to be convinced.
Data is key.
Anyway, back to the markets now and the ASX 200 is going to have a good day if the SPI traders are right. They have build on this week’s resilient trade on the physical market and added another 24 points overnight. That’s busted resistance and opens the way for a full retracement of the selloff. If US markets play ball that is.
On currency markets forex traders misread the minutes initially. The dollar weakened and the Aussie rallied into the mid 0.7870’s from 0.7835ish beforehand. It’s back at 0.7811 now, down 0.85% over the past 24 hours. The euro was also higher after the minutes but its dipped back a little to be down on the day at 1.2328. The pound is down about 0.2% at 1.3971 and the Japanese yen has lost about 0.3% with USD/JPY up at 107.60. The kiwi is higher though at 0.7360.
On commodity markets, JPMorgan (NYSE:JPM) is the latest major player to join the bullish club. But that hasn’t helped prices overnight with copper and base metals under a little pressure. Gold is down at $1224 after being up, strangely, at $1332 earlier. Likewise, oil is lower now too with WTI and Brent down 1% and 0.35% respectively.
On the day today we get API crude data in a couple of hours, then its quiet in Australia and Asia before German Ifo business survey tonight as well as the latest update of UK GDP. Canadian retail sales are also out as are US jobless claims and the EIA energy market data in the US.
Here's What I Picked Up (with a little more detail and a few charts)
International
- European flash PMI’s missed and whiffed a little overnight. As you can see in the table below – from Investing.com – all the flash PMI’s missed both forecasts and printed under last months numbers. The Citibank Economic surprise index is now back in negative territory – that’s the first time since September 2016 folks. Ahem and all that throat-clearing stuff. All the good news priced in? Have we passed peak EU growth already?
- In the US on the other hand the “flash” PMI printed above forecasts and last month for both the manufacturing and services sectors. That of course meant the composite did the same. Indeed the manufacturing print is the highest since 2014 and the Citibank economic surprise index for the US sits at 50.0. So folks we have a market.
- The Fed minutes are out this morning and they clearly show the dichotomy of views on the board as the recalcitrant doves hold firm while other members look to stimulus and the growth outlook as a driver of inflation. For example, the minutes reflect that “a majority of participants noted that a stronger outlook for economic growth raised the likelihood that further gradual policy firming would be appropriate". But also showed that, “some participants saw an appreciable risk that inflation would continue to fall short of the committee's objective'' and judged the FOMC "could afford to be patient". Markets have taken this as a dovish tilt.
- But my sense is that the debate is consistent with what we have heard from the Fed and Fed speakers over recent months. It is up to the data to confirm or deny either side of this debate and the Fed will act accordingly. The question you have to ask is whether the views might have been a bit harder had the Fed seen the January labour data, which came out after the meeting. And then, of course, the associated question – which will be answered in months to come – is whether the wages gains shown in January were in fact weather-related as some say. So markets are guessing on 2-3 hikes for now and we’ll all have to keep watching the data to see which way the wind blows.
- That said though, in the past 30 minutes since I wrote that, it is clear the market has changed its read from dovish to hawkish. The reason seems to be a recognition of the reason why the Fed highlighted its change to include the words "further gradual" in the statement. As I highlighted it's still data depandent but it's quite a positive outlook on the economy. The minutes said, "Members agreed that the strengthening in the near-term economic outlook increased the likelihood that a gradual upward trajectory of the federal funds rate would be appropriate. They therefore agreed to update the characterization of their expectation for the evolution of the federal funds rate in the postmeeting statement to point to "further gradual increases" while maintaining the target range at the current meeting. Members continued to anticipate that the federal funds rate would likely remain, for some time, below levels that were expected to prevail in the longer run. Nonetheless, they again stated that the actual path for the federal funds rate would depend on the economic outlook as informed by the incoming data". DATA!!!
- Not blowing in the wind were Fed doves Neel Kashkari and Patrick Harker. Kashkari, President of the Minneapolis Fed, said the central bank should chart its own course and not be spooked by market pricing and expectations while Harker, President of the Philly Fed, said he’s only got two hikes pencilled in for this year. We get more speeches in the days ahead from other Fed officials. And it’s not too long now before we get the next installment of US GDP and jobs data – next Thursday and Friday nights in fact!!!
- Former BoJ board member Shirai said yesterday the BoJ will struggle to raise rates this year. Couldn’t agree more. The reappointment of Kuroda, his statements before and after suggest that the history of the missteps and false dawns of the past couple of decades or so of Japanese growth weigh heavy on the central bank – and government of prime minister Shinzo Abe – and they will wait as long as possible to exit accommodation and thus give the recovery the best hope of long term success.
- Yesterday I reported that Jens Weidmann – the Bundesbank’s hawkish leader – is the front runner to replace Mario Draghi at the helm of the ECB. Not so fast, says the Italian economy minister. Pier Carlo Padoan said “Italy would like to see the policy that turned out to be essential for saving the single currency continued,” adding “we should always be grateful to Mario Draghi because the great political courage behind his decisions saved the currency. If he had followed the mechanical rules that others sought, it wouldn’t have happened.”
Australia
- The ASX again showed resilience yesterday to end in the black by just 3 points, but still in the black nonetheless. It’s a sign – this week's price action – that the underlying demand for stocks remains intact. Whereas there have been excuses to sell for the most part the index has managed to remain positive.
- And this morning SPI traders are sharing that positivity. But whereas prices were up close to 50 points not long after the FOMC minutes were released the reversal of the Dow and S&P off highs has likewise knocked the SPI lower. It's still holding above teh top of the 5,892/5,922 zone I highlighted it needs to break to run higher. But only just. That’s an encouraging sign for the bulls and the chart now suggests a full round trip to the 6070 level where the big fall of a couple of weeks back kicked off. But it's very dependant on where US markets go - as we head toward the close quite frankly that is not encouraging.
- Yesterday’s data was interesting. Wages managed to increase just the tiniest margin more than expected with the quarterly WPI and year on year rate beating by 0.1% to print 0.6% and 2.1% respectively. It’s still not the greatest result and while a small step in the right direction the RBA is going to continue to be concerned about the outlook – especially for private wages.
- But, as part of my presentations over the past couple of weeks I’ve included a chart which my mate David Flanagan at Curve Securities has knocked up which shows the relationship between the underemployment rate and wages – with underemployment shifted forward six months. As you can see there is some cause for hope that wages will rise in the quarters ahead based on this relationship. Baby steps for certain – but steps nonetheless. Now we watch underemployment in each month's jobs data. Here’s the chart.
Forex
- Have we reached peak Euro area growth? Is the pulse that saw a recalibration of expectations of EA growth and thus also a recalibration of ECB intentions now assimilated into forecasts? I think the answer to all these questions is yes. And as I have noted previously as the US continues to accelerate and as Europe dips a little or fails to accelerate further policy divergence will again become a theme in markets.
- All this is backdrop to the news of the utter collapse of the Citibank economic surprise index for Europe recently. From 42 at the beginning of the month the CESIEUR has collapsed over the course of the month and printed -0.02 overnight after the PMI’s for the region missed. At the same time the CESIUSD has remained above 50. In and of itself this is not the greatest indicator – either outright or as a spread – for the EURUSD rate. But it is indicative that even with markets thinking Weidmann will become ECB boss policy divergence will be significant between the Fed and ECB because their economies are in different places. For me that biases Euro lower here and now as traders start to think about that and factor it in.
- I expect the euro to head down and through 1.22 toward support at 1.1980 in the current environment – on the basis of my take on the charts.
Commodities
- JP Morgan reckons inflation is coming back and that is going to be good for commodity prices. Bloomberg reports the bank says that with stronger US wages numbers and recent US CPI data that “inflation has come and it should be good for commodities”. Going further JPM said, “in fact, metals, both base and precious, exhibit their best performance (both outright and volatility-adjusted) when inflation has reached the Fed’s 2 percent target and continues rising”.
- PLEASE NOTE - this was written before the FOMC minutes and before oil started falling. BUT THAT REINFORCES MY VIEW. Obviously, that JPM report wasn’t meant to reflect overnight moves or indeed influence them. So it’s no surprise that with a stronger US dollar commodities are broadly a little weaker. Oil continues to back off resistance as traders still worry about US inventories and production numbers. Brent has done a little better than WTI overnight. But it remains the case that unless or until Brent can take out the 50% retracement and 61.8% retracement in the $65.80/$66.85 region then the balance of probabilities looking at the charts suggest a move down to $61 and possibly into the high 50’s soon after if that breaks.
Have a great day's trading.