Yellen Sets The Ground For The Fed's 2017 Tightening Cycle

Originally published by AxiTrader

Key Takeaway

US stocks are up again and making new records. That’s despite the rise in interest rates and the US dollar rose after Fed chair Janet Yellen made it clear the FOMC will be considering whether to raise rates at its “upcoming” meeting. That Yellen was hawkish was as expected after Stanley Fischer’s comments on the weekend. But the big question – one that stocks seem to have already answered – is whether Yellen’s words will be followed with action.

On forex markets after being on the back foot during Asian trade the US dollar has turned around and is sharply higher again against the yen, while the pound, euro, and Australian dollar are all lower than where they were when trade closed in Australia.

Gold is hanging tough, crude is a little higher, copper is down on mediation talks at Escondida.

On the data front the combination of Chinese, German, UK, EU, and US data continues to support the notion that the world is reflating – more on that in a post later this morning.

What You Need To Know

• S&P 500 +9 (0.4%) 2337 (8.20 am Sydney)
• Dow +92 (0.45%) 20,504
• Nasdaq 100 +19 (0.3%) 5782
• SPI 200 +27 (0.5%) 5729
• AUDUSD 0.7660 0.3%
• Gold $1229 +0.3%%
• WTI Oil $53.101 +0.15%%

International

• Stocks in the US are up again and have made fresh record highs as the Trumponomics rally outweighed the warning from Fed chair Yellen that rate hikes are still a big part of the Fed’s outlook for 2017. The Dow Jones Industrial Average is up 0.3% to 20477, the Nasdaq is at 0.2% at 5,773, and the S&P 500 is up 6 points, 0.2%, to 2333.

• Rates in the US are higher with the chances of three Fed rate hikes being repriced closer to 50% now from less than 20% yesterday. US 10’s are up 5 points to 2.48% which dragged German rates up 3 points to 0.37%.

• That’s all pretty solid given Yellen’s testimony before Congress overnight. She said many things including that the repeal in Obamacare could impact consumer spending, that the Fed has the mandate to oversee banks and negotiate with international partners on regulations.

• But the key point is she said rates need to rise. That’s important because to wait it to risk having to overreact and then knock the economy – and markets – for six. Here’s what she said (my emphasis):

“At its meeting that concluded early this month, the Committee left the target range for the federal funds rate unchanged but reiterated that it expects the evolution of the economy to warrant further gradual increases in the federal funds rate to achieve and maintain its employment and inflation objectives. As I noted on previous occasions, waiting too long to remove accommodation would be unwise, potentially requiring the FOMC to eventually raise rates rapidly, which could risk disrupting financial markets and pushing the economy into recession. Incoming data suggest that labor market conditions continue to strengthen and inflation is moving up to 2 percent, consistent with the Committee’s expectations. At our upcoming meetings, the Committee will evaluate whether employment and inflation are continuing to evolve in line with these expectations, in which case a further adjustment of the federal funds rate would likely be appropriate.”

• My sense is this could be more hawkish than the market recognises. But that is tempered by the fact Fed speakers rhetoric before the last meeting was more aggressive than their subsequent brief statement. So I guess the markets takeaway is rates will be rising but the Fed is still a little unsure of when.

• Worth noting is that chair Yellen may not actually be a dove. She might simply have been a dove because that is what the US economy needed from the leader of the Fed. But now the US economy needs a somewhat more hawkish Fed chair. So she is becoming that leader. Not a leopard changing its spots but rather a fluid leader changing as the battlefield morphs.

• On the face of it the resignation of the White House NSA General Mike Flynn doesn’t have any implications for markets. But keep an eye on any fall out, or others within the President’s inner circle or that it is becoming a distraction for the economic and policy plans of the president. Stocks may not like that.

• The last 24 hours suggest global reflation is still in train. Chinese inflation data yesterday showed a sharp acceleration in PPI and a rise in CPI. That was driven by energy prices as the base effect I’ve been writing about for months takes effect. German CPI printed 1.9% YoY, while UK inflation data showed a big lift in core CPI but a faster than expected fall in the retail price index which dipped 0.6%. US PPI moderated but was slightly higher than expected at – a benign – 1.2% YoY but higher than expected MoM print of 0.6%.

• One thing that stood out for me on the US data front was the release of the important NFIB (small businesses) optimism index which continues to be strong with a slightly better print of 105.9 than last month.

• GDP data was also out in Germany and Europe. All members of the EU grew in 2016 – yes I know – but not all grew in the final quarter EU data showed. Overall EU GDP was 0.4% for the quarter and 1.7% year on year. Both a little weaker than expected but still much better than many hoped 6 or 12 months ago.

• Worth noting – in the context of the new debt crisis – is that Greek GDP went backwards.

• Oh, and it's one month till the Dutch election

Australia

• After an awful day yesterday on the S&P/ASX 200 where the market approached 5800 failed and then ended in the red futures traders are betting on a better day today. The SPI 200 March contract is up 20 points, 0.4%, to 5722.

• In many ways that negates what I was going to write this morning about the price action on the ASX200 after yesterday’s failure at 5800. But then again what happens in the futures markets is a reflection of what has happened overnight.

• So it is worth highlighting the price action yesterday and the rejection from the 5794 high could be the signal that enough is enough for this rally. Today’s price action will be very important for the market’s psyche.

• Naturally the continued rise in US stocks is positive for the market. But even though the financials are again leading the US market higher it’s reasonable to ask if Australia’s banks can follow suit. Or are they fully priced? My sense is the latter as Banks such as Macquarie and Bankwest signal a toughening of lending standards for borrowers.

• The RBA is right it seems. Even though most forecasters still look askance when they see the RBA’s bullish outlook on growth the release yesterday of the NAB’s monthly business survey, which showed conditions jumped to a post GFC high of 16 with confidence up 4 points to 10, suggests Australia’s central bank might be onto something.

• Crucially the NAB reported the employment sub index hit its highest level in 5 years, while trading conditions rose again and profitability remained strong. The National Australia Bank Ltd (AX:NAB) itself is still questioning its own survey and the stickability of these excellent conditions and confidence as the housing construction boom fades across the course of 2017.

Forex

• The USD was under pressure in Asia yesterday. Only mild pressure but pressure but pressure nonetheless. All that changed overnight as Fed chair Yellen reiterated that the Fed is still set on the path of raising rates. euro is at 1.0572, USDJPY is up at 114.20, and the pound has fallen back with GBPUSD at 1.2470 for a loss of 0.5%.

• I won’t over egg this section because I talked about Yellen. But suffice to say she reinforced the notion of policy divergence between central banks, and thus currencies, in the months, and year ahead.

• That will continue to pressure the Yen and Euro where both central banks seem to have fixed positions holding rates low. The euro needs to hold above 1.05 if it is to avoid “shot duck” status. 115 seems to be a bit of a tractor beam for the yen. A break would signal a run toward the highs from late 2016.

• Looking at the yen, the daily charts suggest higher levels before this run is done. But the 4 hourly charts suggest prices have run into resistance overnight and need to dip back under 114 before recharging the bulls batteries.

• For the Australian dollar it was another underwhelming performance even though the NAB business survey result saw it bid in Asia yesterday. That again reinforces the 77 level as a nut too tough to crack right now for the AUD/USD.

Commodities

• Short and sharp today for commodities.

• The CEO of BP (LON:BP) gave a clear picture of where oil prices are and are not going overnight. He said prices would likely head into the $55-60 region but not much more . That’s the place where – I’m paraphrasing – the world avoids further destabilisation in producing nations. And it’s also the region where too much shale doesn’t hit the market.

• So crude is up this morning but still strapped. WTI rose 0.74% to $53.32 which Brent is up 0.88% to $56.08.

• Gold tested the breakout again with a low of $1221. It’s under pressure from a stronger US dollar and rising stocks. But geopolitics is keeping it bid right now and it's back near $1229 this morning. For those interested in gold it is worth looking at a piece I wrote on the technical outlook at the moment yesterday. Gold has been charting almost perfectly recently.

• Copper is lower after the union at the Escondida mine agreed to mediation. It’s down 1.3% at $2.74 testing the breakout.

Today's key data and events (all times AEDT)

• Australia - New Motor Vehicle Sales (MoM) (Jan), New Motor Vehicle Sales (YoY) (Jan) (11.30am)
• New Zealand - Nil
• China - Nil
• Japan - Nil
• Germany - Nil
• EU - Non-monetary policy's ECB meeting (7pm); Trade Balance n.s.a. (Dec), Trade Balance s.a. (Dec) (9pm)
• UK - Average Earnings including Bonus (3Mo/Yr) (Dec), ILO Unemployment Rate (3M) (Dec), Average Earnings excluding Bonus (3Mo/Yr) (Dec), Claimant Count Change (Jan), Claimant Count Rate (Jan) (8.30am); CB Leading Economic Index (Jan) (1.30am)
• Canada - Manufacturing Shipments (MoM) (Dec) (12.30am)
• US - API Weekly Crude Oil Stock (8.30am); MBA Mortgage Applications (Feb 10), NY Empire State Manufacturing Index (Feb), Retail Sales ex Autos (MoM) (Jan), Retail Sales (MoM) (Jan), Retail Sales control group (Jan), Consumer Price Index Core s.a (Jan), Consumer Price Index (MoM) (Jan), Consumer Price Index n.s.a (MoM) (Jan), Consumer Price Index (YoY) (Jan), Consumer Price Index Ex Food & Energy (MoM) (Jan), Consumer Price Index Ex Food & Energy (YoY) (Jan) (12.30am); Capacity Utilization (Jan), Industrial Production (MoM) (Jan) (1.15am); Business Inventories (Dec) (2am); EIA Crude Oil Stocks change (Feb 10) (2.30am); Total Net TIC Flows (Dec), Net Long-Term TIC Flows (Dec) (8am)

Have a great day's trading.