Welcome to my daily Markets Musings.
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Market Summary (7.44am Friday, July 6 – Tariff Day)
The Fed minutes was ostensibly the big event overnight. But the Fed’s thunder was stolen by the release of much stronger than expected German factory orders (+2.8% v 1.1% exp) and a somewhat hawkish speech from BoE governor Mark Carney suggesting the bank is on track to hike rates this year.
That combination saw the Greenback take a bath at one stage with GBPUSD hitting a high around 1.3274 while EURUSD peaked (again) just under 1.1720 with a high around 1.1719. They are trading at 1.3218 and 1.1687 respectively down 0.09% and up 0.3% from 7am yesterday morning my time.
Elsewhere in forex land it was interesting but less exciting in many respects with USDJPY again trading above 111, but it’s at 110.66 now for a 0.2% gain. The Australian dollar too rallied and then pulled back. It traded above 74 cents again and is at 0.7384 now, largely unchanged over the past 24 hours even though copper is collapsing once again. The Kiwi is up 0.4% at 0.6786 while the CAD is flat at 1.3130.
That the Fed minutes didn’t find the traction in forex markets that a clear signal that rates are going to keep rising is down to a couple of factors. Headline writers and editors clearly want to focus on the Fed looking at the possible fallout of the trade war and the flattening of the yield curve in the US. So the stories have been framed around the emerging risks rather than the central theme.
People feel changes, not levels as I often write.
And it was this slant, both on the headlines that were released at 4am my time and then subsequently in the stories about the minutes, that have dominated the conversation. But my read of the minutes is that the Fed is alert but not alarmed by the risks and is instead focussed on tight labour markets, labour availability, rising inflation, the ability of companies to pass price rises on, and rising wages. It even said it had done away with the accommodation language because it was, " no longer appropriate in light of the strong state of the economy and the current expected path for policy".
Non-farms tonight (Exp: +195k, UE 3.8%, Avg Earnings 2.8% yoy) is now the key. A weak number and the focus is on what the headline writers and editors saw as important. Though I wonder if the US can continue to generate as many jobs as it has recently a strong number on the other hand (even if its just low unemployment and an acceleration in earnings) will refocus attention on what the Fed actually said and that 2 more hike Dot Plot.
Anyway…to stocks then and the chance the US will agree a deal on no tariffs at all on cars between the EU and US has helped sentiment on both sides of the Atlantic. The DAX was 1.2% higher, the CAC rose 0.86% while the FTSE in London was 0.4% higher as it grappled with Carney’s signal that rates are likely to rise in the UK.
In the US the Dow rose 0.75%, the Nasdaq 100 was 1.2% higher – Micron Tech said the paten case won’t impact it too much – and the S&P 500 rose by 0.86% to 2,737. That’s a big turnaround from where futures were yesterday in Asia when Chinese stocks were again getting belted.
It’s as if the main game – which has always been China – doesn’t actually go live today US time. And it’s as if President Trump won’t retaliate to China’s retaliation to the US tariffs. Anyway.
Here at home the levitation continued on the ASX yesterday which closed at 6,215 despite further falls in Chinese stocks. Overnight SPI traders have added another 28 points, so its expected to be a good day on the local bourse today.
On commodity markets Gold is stable at $1256 this morning. But I can’t say that about copper which lost another 3% overnight with the front HGC contract dropping to $2.815 this morning. Zinc, lead, and nickel were also down sharply. Oil was also lower after an unexpected build in US inventories of around 1.25 million barrels. SO this morning WTI is down 1.55% to $72.99 while Brent is off 0.8% at $77.64.
Bitcoin has lost 3% to $6,497 while the US yield curve has flattened further to 27.80 points this morning with the 2’s at 2.56% and the 10’s at 2.84% as traders fear a policy error.
On the day today, we get the AiGroup performance of construction data in Australia along with Japanese earning and spending data. German industrial production data tonight will be interesting. In Canada it’s trade, the Ivey PMI, and jobs dat. But it’s US non-farms and the associated data which is the big event and will set the tone for the week, perhaps month, ahead. US trade is also out.
Have a great day and a cracking weekend.
Here's What I Picked Up (with a little more detail and a few charts)
- Peoples view of the Fed minutes has been shaped by the natural inclination of headline writers to focus on the implications of the trade war on the outlook. For me that’s the wrong take though because while the Fed quite correctly highlighted the risks around the uncertainty the trade wars can cause for investment, and wile the Fed also – quite correctly – noted the issues the flattening of the bond curve highlights about the outlook neither swayed them from the central tendency which is that rates need to continue to move higher.
- My key takeaways of the Fed minutes is as follows;
- Economy tracking well
- Inflation rising
- Some price rises ARE being passed on
- Labour #Markets remain tight
- Unemployment below what the Fed thought it could get to
- Wages are lifting
- Trade IS increasing uncertainty
- Rates to keep rising
- The forward guidance language was removed because it was, "no longer appropriate in light of the strong state of the economy and the current expected path for policy". THAT IS, HIGHER RATES FOLKS, higher rates.
- None of this is a surprise...We'll see how the data flows in the coming weeks and months. But if it tracks as expected then the Fed is hiking a couple of times this year...BoE once maybe, BoC once too perhaps, ECB, BoJ, RBA and RBNZ not at all.
- So, I had a jaundice view of the US ambassador to Germany’s attempt to divide and conquer Europe by holding out the olive branch/poison chalice (strike out whichever you prefer) of deal which drops tariffs on autos to zero in both the US and the EU. But the car companies have bought in it seems. And so too has German Chancellor Angela Merkel who said overnight that she would back lowering EU tariffs on US auto imports. Subject to European consensus of course.
- BUT, TRUMP IS WINNING FOLKS. So why would he do anything other than ratchet up the pressure on China. Remember today is the day the first round of $34 billion of tariffs is instituted on Chinese goods. That will be followed by $34 billion of retaliation from China and then further escalation from the US - $60 billion is the chat this morning. So things will get worse before they get better on trade in a macro sense and certainly between the US and China.
- Here’s a good visualisation from Oxford Economics of how the Trade War escalates.
- BoE governor Mark Carney, a Canadian, took aim at Donald Trump and his tariffs in a speech overnight looking at the industrial revolution and globalisation. A couple of key things jumped out at me. On the revolutionary, or perhaps automation, angle he said (my bolding), “A fundamental challenge is that, while technological revolutions ultimately drive great improvements in prosperity, they first involve painful periods of adjustment. It takes time for new jobs to be created to replace those made obsolete. It can take more than a generation for new skills to be acquired. And decades can pass before gains in productivity flow through to the wages of all workers”. He also said Brexit could be used as a template for the tariff impost and that on this front factoring previous forecasts of growth and taking account strong EU and global growth Brexit cause an economic shortfall of around 1.75% to 2%.
- The result Carney says is that, “The experience of Brexit underscores that the impact of global trade war will be greater the more business confidence is affected, the more financial conditions tighten and – most fundamentally – the more permanent the loss of openness is expected to be…Adding on a fall in business confidence and tightening financial conditions to the direct trade channels in the simulations and the possibility that the tariffs could be viewed as permanent could plausibly double the losses in output, while moderating somewhat the impact on inflation…Over the longer term, reduced productivity growth would be expected to compound the output losses from a sustained trade war”.
- ON the US yield curve…THIS
- Oh, and with Chinese shares under pressure once again it night be worth keeping this in mind. Bloomberg reports that the level of leveraged stock positions in the Chinese markets is getting to a point where the collateral may be less than the value of the stocks underlying the loans.
- Earlier this week I shared a chart of the move in credit demand and noted the impact that would have on housing and growth. I also shared a chart of analysis showing that there was a strong relationship between demand for credit and economic growth. That, of course makes sense. The whole point of modern central bank policy is to stimulate consumption now – whether from savings or debt. In every sense the whole model has been built on borrowing growth from the future.
- But, a combination of APRA’s regulatory changes over recent years (APG223 in particular), falling house prices, high debt levels, and low wages growth materially threaten the outlook for the consumr side of the Australian economic growth calculation. I raise this again this morning as an introduction to a piece written by David Scutt over at Business Insider which shows the amount Australian can borrow to buy a property has been cut by as much as 20%. Think about that. That means the high water mark is in for leverage property purchases. That means we’ll have a period where Australians feel less wealthy. That in turn will impact consumption choices. Just something to keep an eye on.
- To the Aussie dollar then and it was again the USD move which has helped the Aussie resist the weakness we are seeing in China and in industrial metals markets like copper. Again this morning morning the AUDUSD is about 50-70 points above the 0.7310/20 region the copper price fall would suggest. Likewise though the AUDUSD is about 40 points below the 0.7420 region that the Euro’s appreciation in recent days would suggest. But at 0.7380/90 the AUDUSD is roughly in line where the recent moves in the USDCNH would suggest it should be.
- That’s a strong indication however that non-farms tonight are again going to be important for the Aussie’s near-term moves. I say that because the print will impact Euro – one way or the other – and is also likely to impact the Yuan’s rate both on and offshore. So while I’ll be watching the Yuan’s move in Asia it’s the NFP results at 10.30pm tonight which are the key. Levels on the day are 0.7405/10, 0.7425, and 0.7445/50 topside and 0.7370, 0.7335, and 0.7300/15 bottomside.
- What’s the McKenna Mantra? Respect levels unless or until they break. That’s all I have to say about the ASX and the SPI. Here’s the SPI chart. It speaks for itself.
- I still believe that economics and central bank policy are important drivers of forex rates now and in the future. To that end tonight’s non-farm payrolls, coming after a most positive Fed minutes this morning, is going to be critical to that discussion.
- Equally though last night BoE governor Mark Carney also signalled rates will rise in the UK during the speech I referenced above. Carney said, “As the MPC has stressed, were the economy to develop broadly in line with the May Inflation Report projections – with demand growth exceeding the 1½% estimated rate of supply growth leading to a small margin of excess demand emerging by early 2020 and domestic inflationary pressures continuing to build gradually to rates consistent with the 2% target – an ongoing tightening of monetary policy over the next few years would be appropriate to return inflation sustainably to its target at a conventional horizon”. He also said he’ll have enough information by the August meeting to make a rate decision.
- Naturally Sterling rallied on the news. But it has been unable to hold those gains and reversed back to be largely unchanged.doubt some of that is continuation of the Brexit messiness. But it’s also a clear sign, along with the reversal in the Euro and other pairs that tonight’s non-farms is the key datapoint everyone is looking at.
- Some EW and cycle folks I follow suggest now would be the perfect time for a surprisingly weak outcome to reverse the USD for a month before it picks up again. But overall the momentum in the US economy does seem to be enough to deliver a “hawkish” result even if the actual number of jobs created is becoming constricted by availability issues in the US. Either way it will reinforce the primacy of central bank and relative economic performance as the key driver of forex markets for a while yet.
- The key is still Euro in a USD macro sense.The levels are shown on the chart and it’s worth noting again that the Euro failed to break the inside resistance in this channel.
- Just quickly as I’ve run dry on time. Fundamentals were back to the fore pushing aside geopolitics and President Trump’s tweets as the primary driver of oil markets overnight. The 1.245 build in inventories was a big build relative to the around 3.5 million barrels traders had been expecting as a draw. Of course the fact that the US Navy said it WILL keep the Strait or Hormuz open and a sense that maybe the Iranians were back tracking a little in the face of a potential US response perhaps also helped drive oil lower.
- Technically though the past few days inability to get up and through the recent high (which was also a previous target) also set up the preconditions for a reversal. $70.84 seems a reasonable technical target for me now.
Have a great day's trading.
Chief Market Strategist
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