Welcome to my daily Markets Musings.
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Market Summary (7.34 am Thursday, June 14)
The Fed hiked rates 25 basis points into the 1.75-2.00% range this morning and signaled it has confidence in the United States economic momentum and that given the outlook for the economy, the jobs market, and inflation, that it expects to hike rates another two times this year and up to 4 times in 2019.
That’s a hawkish hike – no two ways about it.
As a result, the pricing for that 4th hike is back above 50% the CME futures data shows. Likewise, US 2 year rates are up at 2.57%, the 10 at 2.975% (it did touch 3% at one point) and the 2-10 curve is at 40 points. That’s the smallest spread in a decade.
Naturally as a result of the above stocks dipped. But not too much really given how hawkish this tilt from the Fed was. No doubt a big part of that is because the Fed and it’s chair Jerome Powell highlighted that even with an upward expectation of rates movements will continue to be gradual with an aim to keep growth positive and the US out of recession.
So the S&P 500 which was flat a little before the Fed statement at 4am this morning ended the day down 0.40% at 2,775. Last night’s high of 2,791 might be it for this run. The Dow dropped half a percent losing 120 points to close at 25,201. The Nasdaq was flat and closed at 7,207.
Europe had been mixed and will likely have to do a little catch up selling when trade begins this afternoon while here at home SPI traders have only knocked another 3 points off the SPI overnight after yesterday’s 31 point fall on the ASX 200. Keep an eye on the big miners and of course the banks – the charts for the banks look awful folks.
Probably the most interesting move of the night though was the US dollar. It had been under pressure all night but initially gained on the back of the hawkish tilt from the FOMC. But that strength was swiftly reversed after the Wal Street Journal published an article saying the US is readying tariffs on China as soon as this Friday.
The result was that the Euro fell from 1.1787 to 1.1724 in the aftermath of the Fed but is now all the way back at 1.1788 for a 0.4% gain on the day. I know, stupid. But the USD has come under selling pressure every time the China trade war has reared its head. Euro bulls best watch out for Mario Draghi and his ECB colleagues tonight – they need to deliver otherwise all heck could break loose.
Naturally, the corollary of the Euro moves has been similar moves on the other majors. USDJPY is well off its 110.83 high at 110.30. Likewise Sterling is off its lows at 1.3372. The Australian dollar is midway between the overnight high above 76 cents and the post FOMC low of 0.7528 sitting at 0.7576 at the moment largely unchanged. Unemployment will be a big one for the Aussie today.
The Kiwi held 70 cents and is at 0.7019 while the CAD sits at 1.2988. Both have gained 0.2% against the USD.
To commodities now and while the machinations in OPEC continue traders focussed on the bigger than expected draw in US inventories which saw crude stocks drop 4.14 million barrels. As a result WTI is up 0.44% to $66.64 while Brent is up 0.94%. Iran is making mischief suggesting OPEC’s meeting will be a very interesting one later this month.
Gold is at $1299 still jogging on the spot while Copper is at $3.24 also largely unchanged.
Bitcoin, however, remains under intense pressure. It needs to hold $5,950/$6,000 or it could halve in price. BTCUSD is currently trading $6250 off a low near $6100 overnight.
On the day then the ECB meeting tonight looms large over forex markets. But before that we get the latest read on Australia's jobs market with the May data released at 11.30am this morning. The Reuters poll says economists are expecting an increase of 18,000 jobs and an unemployment rate of 5.5%.
A little after that data is released in Australia we get the triple treat of retail sales, urban investment, and industrial production in China. Japan also has production data out while German CPI tonight will be interesting. Retail sales are out in the UK and US along with US import and export price indexes.
Have a great day – it’s another big one.
Here's What I Picked Up (with a little more detail and a few charts)
KINDA HUGE TODAY
- It’s complicated, but the key takeaways from the FOMC statement are:
- 2 more hikes in 2018 – that makes four folks (yes you heard it here first a long time ago)
- 2-3 more in 2019 with median March projection of3.1% and then 3.4% in March 2020
- The Fed dropped their forward guidance on keeping rates low at the end of the statement
- Unemployment continues to remain low and fall a little to 3.5%.
- IT expects PCE inflation to flatline around 2.1% (which is interesting given projection on rates)
- 2018 is the high water mark for growth falling to 2.4% in 2019 and 2% in 2020
- Fed chair Powell also announced at the press conference that from January next year each meeting will be accompanied by a press conference
- The Fed again stressed a “gradual” approach to raising rates and its “symmetric” inflation target suggests it will continue to grind out rate hikes. Note the Tyalor rule says 4% is currently appropriate in this economy,
- The balance sheet will continue to shrink.
- Two tweets are worth noting on the Fed - One from Yahoo’s Sam Ro who highlights JP Morgan say there are quarterly hikes coming for the next 18 months – that’s 6 folks and one from me where I reckon Powell was really hawkish in the way he framed his answer. JPM seem super aggressive. But in the context of Powell's framing of this question in presser to me they are not out of the ballpark at all.
- While we were all focussed on the Fed the Wall Street Journal ran an article saying the United States is preparing to proceed with tariffs on Chinese goods. The Journal reported, “The Trump administration, deepening its global trade offensive, is preparing to levy tariffs on tens of billions of dollars of Chinese goods in the coming week, perhaps as early as Friday—a move that is likely to spark heavy retaliation from Beijing”. Indeed it will. The US dollar reversed its gains around this time which seems stupid to me. But that’s the modus operandi forex traders have been using every time a China trade war looms on the horizon.
- Worth noting is what President Trump told Fox New’s Bret Baier. @FxMacro reported on Twitter Trump said, “China could be a little bit upset about trade because we are very strongly clamping down on trade”. Indeed. We USD bulls aren’t real keen today either
- And while I’m talking about China it appears Congress is not happy with the President’s deal with ZTE and are trying to scotch it. Equally, I also read lawmakers are more worried about Huawei and want to go after that company. Worth noting on Huawei is that the Australian government asked the Solomon Islands to scotch its deal with Huawei to built a cable between it and Australia with a new deal being inked yesterday where the Australian government will use its aid budget to pay for two-thirds of the cost of the cable to be built be another provider.
- On North Korea, the naysaying continues in the press but strangely many on the opposite side of the aisle – and former Obama staffers – are actually giving credit where credit is due. More importantly, though Secretary of State Mike Pompeo said the US is aiming for “major disarmament” in the next two and a half years. That’s the timeline to keep in mind. These things aren’t easy.
- And finally the big thing for traders and markets, emerging and developed, is what happens to US 10year rates if the Fed keeps hiking. Here’s a nice ready reckoner of a few different pathways I picked up off Twitter this morning. I’m in the move toward 3.5% - and above – camp.
- The Australian dollar has had a wild ride over the past 48 hours. Having traded up to a high around 0.7625 two nights ago the battler then fell into the 0.7550’s around the time that RBA governor Lowe delivered his message that rates wont be rising anytime soon here In Australia. USD dollar weakness subsequent to that saw the Aussie rally back above 76 cents to make a high around 0.7608 before the Aussie bulls were absolutely blindsided by the hawkish tilt of the FOMC. That saw the bears take control and the Aussie fell the best part of 80 points to around 0.7528 before the USD lost its mojo again and the roaring Euro lifted the Aussies boat back into the 0.7570 region.
- But while most of that action has been about and around the USD today is a day when Aussie dollar traders can get back to basics and focus on Australia and data which is important to Australia. To wit, the release of employment data here at home and the triple treat out of China will be important as to whether the Aussie can get back to 76 cents or whether it again falls toward the overnight lows. Predicting Chinese data is of course much easier than Australian data due to its lack of variability. So that should be supportive. But Australia’s employment report is on the volatile end of volatile when it comes to prints and standard error. Of course, economists are expecting another benign print of 18,000 and an unemployment rate of 5.5%. But any material deviation will move the Aussie. Key levels are 0.7559 then28 on the low side and 0.7609 and then 0.7625 topside. The USD and the ECB will be key tonight.
- To stocks then and the ash CFD doesn’t look so flash here on the ASX. It’s testing support from the April low and it’s a ine which has had 4 or 5 touches/approaches. So it’s a line that clearly others are watching and as such it is a line that if broken could suggest a deep fall. A break of 6010 opens the way to 5,975 and then 5,940. 6010 has to break first though – remember the McKenna Mantra. Respect levels unless or until they break.
- Yesterday’s Westpac consumer sentiment survey wasn’t too bad. The headline index level lifted 0.3% to 102.1 and consumers views of family finances recovered some of last months interesting and large losses. But the outlook for the economy fell sharply this month. More tellingly though was that the unemployment expectations index rose 5.7% last month. Lower is better for this sub-index as higher reads mean consumers expect unemployment to rise in the years ahead. Mathew Hassan, Westpac senior economist, said in a note accompanying the survey that, “the jump this month confirms the softer tone coming out of the labour market since the start of the year”. That’s interesting given we get the release of the May jobs figures for Australia today.
- What the Westpac survey also showed is that house price expectations fell by 7.3% in the month which is the lowest read since 2016. Matthew Hassan added, “Expectations showed particularly sharp pull-backs in NSW (–13.8% to 103.9), and Vic (–11.8% to 123.9). Some of this may be a seasonal softening heading into the winter period”. What’s weird about that print is that ‘time to buy a dwelling’ index rose 4.5%. That’s the second highest read since September 2016. Sentiment was particularly strong in NSW. Two things are happening here. Australians seem to believe prices will continue to fall but that this offers opportunities as affordability improves. On balance then that nets out – to a certain extent but not entirely.
- And just quickly on RBA governor Phil Lowe’s speech yesterday on “Productivity, Wages, and Prosperity”, the key takeaway is that rates are on hold for some time, there is slack in the employment market, and that slack is holding back wages growth even though business reports its becoming increasingly difficult to hire suitable staff. Wages need to lift before rates will move Low suggested telling his audience (my bolding):
“Any increase in interest rates, however, still looks to be some time away. The Board will want to have reasonable confidence that inflation is picking up to be consistent with the medium-term target and that slack in the labour market is lessening. At this stage, a sustained pick-up in inflation to around the midpoint of the target range is likely to require faster wages growth than we are currently experiencing. There are reasonable grounds to expect that this increase in wages growth will occur. But for the reasons I have spoken about today, this increase is likely to be only gradual. Given this, there is not a strong case for a near-term adjustment in monetary policy.”
- USD bears had the hot hand pre-FOMC and bulls took a hiding. So while the hawkish hike initially saw the USD gain substantial ground - Euro down to 1.1724 and the AUDUSD to 0.7528 – the USD bears just won’t give up. The Elliott Wave folk will tell you this is usual in the second wave of a down leg when the initial move is reversed. And as a behavioural economics and finance guy I agree wholeheartedly with the psychology that underpins that. What seems to have roiled the USD post FOMC was that WSJ story about the China tariffs.
- Here’s the key though. We have seen that Euro longs just won’t give up reflected in the CFTC data over recent weeks. There is this ridiculous equivalence argument raising its head again that an end to the ECB QE is the same as a reduction in the Fed balance sheet and a continued path of rate hikes. And, by extension, that economic outcome differences (both realised and prospective) don’t matter. That’s what underpins the Euro bid. So the ECB has to deliver tonight. Otherwise, all heck could break loose and the USD could surge.
- EITHER WAY, I REMAIN A USD BULL.
- Regardless of the day to day machinations of the Euro, Aussie, and other major currency pairs the big take away from this hawkish Fed and its signal that rates are going to continue to rise is that Emerging Markets are going to continue to suffer. As I wrote last week this is about loss and other opportunities. Fear of loss in holding emerging markets – so money exits – and better opportunities opening up on a risk adjusted basis in the United States – so money exits emerging markets. That is something we will need to continue to watch.
- To the chart for today and I want to share the monthly Euro chart. This helps explain – from a technical point of view – why I remain A USD bull in the medium term. Equally though if you were to look at a daily chart I would reiterate what I’ve been saying all week that 1.1720/30 to 1.1830/50 is the range right now. Even the monthly shows the importance of that support. Euro bulls have put a lot of stock in the ECB tonight. Me I’m just trading the weekly outlook.
- For all the machinations with this OPEC meeting – the Russians and Saudis moving toward more production, Iran and others fighting back – it is demand and supply that still matter to traders in their day to day decisions. So the big draw in overnight US crude stocks helped get the market moving in a bullish direction as highlighted in the introduction above.
- But don’t underestimate the pressure being brought to bear by the US on the Saudis. Among a gazillion tweets overnight was one short sharp one from President Trump about oil. He tweeted simply, “Oil prices are too high, OPEC is at it again. Not good!”. But Iran countered that the US can’t put sanctions on two OPEC founding members and still blame OPEC for oil price volatility. So OPEC may battle but it seems to me that the Saudis and the Russians are likely to move toward a change to the current deal at he June 22 meeting.
- Looking at the chart for WTI I’m wondering if I’m completely wrong about the outlook. Prices just keep creeping higher. I need to think on this. In the mean time – here’s the daily chart.
Have a great day's trading.
Chief Market Strategist
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