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Markets Morning - US CPI is on the Fed's track but not fast enough to scare stocks and bonds or help the USD

Market Analysis /
Greg McKenna / 11 May 2018

Welcome to my daily Markets Musings.

Feedback always welcome


Market Summary (7.37am Friday May 11)

Is inflation really going to be a “thing” in the US this year?

That’s the question traders asked themselves last night with the release of the April CPI data which printed slightly lower than expected with headline inflation printing 0.2% mom and 2.5% ypy in the month, while core was 0.1% and 2.1% respectively over those time frames.

To read the commentary, watch the US dollar fall, or the reports of ebullience in stocks you’d swear the data wasn’t tracking as the Fed had expected. Let me disabuse you of that fact right here and now. Inflation did not accelerate faster than expected. But it is on the Fed’s track. And that means the Fed is also on track for two, maybe three, more hikes this year.

What’s really going on is the USD is a little extended and ripe for a reversal (which I hope is big enough so I can get some more in) while stocks broke out the night before. So the data simply fit where the charts and prices were heading anyway.

To those prices and the USD lost about 0.4% in DXY terms to 92.68 and around 0.6% in Euro terms with the single currency back up at 1.1912. The Yen gained 0.3% with USDJPY at 109.41 while the Pound had a wild ride with traders bidding it up before the BoE decision where it hit a high of 1.3617 before the dovish tilt of the bank which accompanied the rate hold saw GBPUSD fall back to 1.3459. It’s at 1.3515 now, down 0.2%.

USD weakness is good for the commodity bloc. So too is higher oil, copper and other commodities. So the Aussie is this morning up around 1% to 0.7535 on it’s way possibly to 76 cents. The move has helped the Kiwi wash away a big chunk of the RBNZ plunge with NZDUSD sitting at 0.6963, down 0.33%. The CAD is 0.7% stronger with USDCAD down at 1.2767.

To stocks now and all three US indexes are higher this morning. The S&P 500 is up 25 points, 0.93%, to 2,723. That’s a solid close because it’s both above the April 19 high – thus breaking the trend of lower highs – and also neatly above the 100 day moving average. The question is where – IF – the sellers will re-enter. The Dow is up 0.8% to 24,739 and the Nasdaq 100 is up 1.02% to 6,963 – Apple and Goldman Sachs have announced a credit card deal. The former hit an fresh record high as a result. Techs back it seems and that’s a positive for the markets.

Naturally after this and a mostly positive day in Asia and Europe yesterday the ASX200 is expected to be higher again if SPI traders have read it right. Overnight they’ve added 15 points to the June contract. That every sector in the US rose, that copper and oil were higher, that gold rose close to $10 (though in XAUAUD terms it’s a little different) should help the local market today. Though this 6,100-6,150 zone is proving hard at the moment.

To other commodities now and as noted gold has managed to rally back to $1321 on the back of a weaker USD. Likewise copper is higher having gained 1.8% overnight to $3.09 a pound. Iron ore is higher as well, along with most of the base metals complex.

On the day ahead we get home loan data in Australia, import and export data in the US, Canadian employment data, and a speech from ECB president Mario Draghi.

Have a great day and weekend.

Here's What I Picked Up (with a little more detail and a few charts)


  • GEOPOLITICS – I think we might have learnt something important about Syria, Russia, and Iran yesterday when the Israeli’s responded to Iranian attacks on its territory from Syria. I say that because while the Israelis responded with overwhelming aggression hitting multiple Iranian backed targets in Syria the Russians sat and watched. That’s important in the context of the efficacy of President Trumps withdrawal from the JCPOA deal because it suggests to me that Russia and Iran are not allied put simply allies of convenience in protecting the Assad regime. Indeed Israeli PM Netanyahu was with President Putin the day before they responded. So Iran might be more isolated than it thought. And the thing that flows from this, and the fact the US and Russians knew about the Israeli retaliation, is that it is also likely President Trump will exercise some leverage on the Saudis to ensure that oil prices don’t shoot to the moon. I’ve covered BAML’s $100 call in the commodity section below. But I’m not convinced. I’ll keep the targets as is for the moment.
  • Sure, CPI inflation didn’t surprise on the upside. But that doesn’t mean the Fed isn’t still going to raise rates two or three more times this year and it doesn’t mean quantitative tightening isn’y going to continue. Indeed if you look at the 2 year note rate of 2.53% it is exactly where it was when I was writing this note yesterday. But a lot of the focus is on positioning further out on the curve with Business Insider running a story saying that “Hedge funds are making a dangerous bet – and history suggests it’s going to blow up in their faces”. Yes that’s the headline. Essentially they are saying bonds can’t rise because short Treasuries is such a crowded trade. They are equally implying that ultimately bonds will rally as these hedge funds get flipped out of their trades. The corollary of this move, if it was to happen, is a weaker dollar though the impact on stocks is less clear but likely positive.  Anyway here’s the BI chart from my iPhone app – I’ve added the “CROWDED” bit.  
Source: Business Insider iPhone App
Source: Business Insider iPhone App
  • We know the date for the US-DPRK summit – it’s June 12 in Singapore. And coming after North Korea returned 3 US prisoners – in a public relations coup for President Trump – hope are high for a resolution to this issue once and for all. Indeed when asked yesterday about the Nobel Peace Prize the President did something he doesn’t do terribly often and demurred. Rather he said what he’d like to get is the Korean Peninsula denuclearised.
  • Commerce Secretary Wilbur Ross says the Chinese have essentially agreed to reduce the deficit he thinks, but how they do that is going to be the difficult question.
  • The Bank of England has backed right off and is worried about the recent downtick in economic stats and the impact that Brexit is having on activity and confidence. That’s my summary of all that I’ve read from the MPC, its minutes and governor Carney’s comments. Carney told the BBC however that rates are still likely to rise ““It’s likely over the course of the next year rates will go up, likely by the end of the year... that’s the most likely thing to happen”.  But he is less certain than recently and even though 2 of the MPC members voted to move rates higher last night Carney is being cautious.  


  • Not the prettiest candlestick on the ASX 200 yesterday. SPI traders have gone some way to remedy that last night with the 13 point rally. But this 6,100-6,150 zone looks tough at present. It contains both this years high and the 6.150 is an important Fibo extension level. We’ll see how we end the week. And then next week the big banks are going Ex.
Click on me, I'll expand
Click on me, I'll expand
  • A superb move for the Australian dollar as the clouds parted and a combination of a weaker US dollar, higher commodity prices, and risk appetite on the back of the stocks rally, helped lift the battler 1% day on day. It outperformed other pairs because of this favourable combination and thus the Aussie is back at the 0.7530/40 region of resistance I highlighted in my daily AUDUSD note yesterday.
  • The Aussies rally, or failure, is being set elsewhere in markets. And in that sense it is simply a residual of other moves.  Another day of stocks rising, and another day of USD reversal and the Aussie can easily get to 76 cents. Though the 0.7566 region is the 38.2% retracement of the most recent downdraft.


  • I’m excited. We might finally be getting the USD reversal, this second wave against the tide of USD strength, that I have been looking for in order to set some longer term positions. Earlier this week I highlight the DXY had become extended in terms of the dailies and even the weeklies. So while we hadn’t seen a consolidation yet the chances were rising.
  • Of course the seemingly benign US CPI inflation last night, coupled with this short term overbought status for the dollar provided the catalyst for the USD to sell off, for the Euro to rally, and for the Aussie dollar to surge. But this was expected. Prices that go straight up, or straight down (other than stocks on the way to zero) usually always have a hiatus of some sort. It comes in two forms. Either a time consolidation where we see an extended period of sideways range trading. Or, alternatively, we see a price consolidation where the elevated, or collapsed, price of the asset moves back toward the 38.2% retracement of the most recent move.
  • In many respect this is an Elliott Wave approach. I’m not really an Elliott waver, but I do believe we see trends (tides) in asset prices which then have waves that flow against the tide. And I believe that this is a fractal in nature – that is it happens in all time frames, big and small. Anyway, that’s all my way of saying this USD move likely has some legs to the upmove but is likely to experience a reversal at the moment.
  • Where to you all ask. The simplest approach is to look at the last big move and draw the Fibo’s on it and count back to a 38.2% retracement. In the Euro that would look like this with the target level 1.2048. 1.1960 is first resistance.
Click on me, I'll expand
Click on me, I'll expand
  • On thing worth thing about on the USD. Reuters reported yesterday that a survey of currency strategists says while the dollar will get a little stronger that strength won’t last and will prove ephemeral by years end. That means this next wave higher could be uncomfortable (as second waves are) if the USD’s reversal extends beyond the 38.2% or 50% retracement levels. Many weak longs will exit and strategist bail and change their view. We’ll see.


  • BAML reckons Brent could hit $100 a barrel next year. Thay are looking for prices to hit $90 in Q2 2019 and see a spike higher as a reasonable chance. There warning though is that “these market dynamics could unfold over a shorter time frame”. The key drivers of this call are entirely reasonable. The bank sees a continued increase in demand but supply disruptions because of the trouble with Venezuelan production and the new Iran sanctions.  The washup is they have pencilled in an average for Brent of $70 in 2018 and $75in 2019.
  • As I noted above I’m not as convinced as the BAML team that we’ll see $100 oil. Certainly it’s the risk given everything that is going on. But right here and right now there is much baked into the cake with oil prices. For example, if I turn the argument on it’s head and imagine that President Trump hadn’t pulled out of JCPOA then ask myself where oil prices would be my guess – yes a guess – would be they’d be down at the break out level around $71.00/25 in Brent terms at a minimum. That’s against a front contract futures price of $77.42. So my sense is there is at least $6 of risk in her. But the break out was a result of the tensions building wasn’t it? So if I reiterate that idea of how much geopolitics has put into the Brent price I’d likely double the level quoted above and say it’s perhaps $12 of geopolitical risk priced into oil. So right here and right now I’m suggesting prices might fully reflect the knowns of oil, OPEC, Iran, Israel, supply and demand, the Saudis, and Russia.  
  • I need, and readers should, temper that sentiment with the fact that though I think trend following the best trading system around, I am at heart – at least rhetorically – a bit of a contrarian, perhaps even an iconoclast. The trend in Brent is still up. But this chart suggests it might soon top. At least for this run.
Click on me, I'll expand
Click on me, I'll expand

Have a great day's trading.

Greg McKenna

Chief Market Strategist


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