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What a week.
New record highs for US stocks, Fed chair Powell promising rate cuts and belting the Fed’s own Phd’s over the head by saying rates aren’t as accomodative as their models suggested, US inflation a little (smidge) higher than expected, and Iran’s belligerence rathcheting up tensions in the Gulf and thus oil markets.
We’ve had signs the trade talks are going nowhere, China’s trade surplus with the US continues to grow data release Friday showed, and we had a weird interevention into crypto markets by President Trump which seems – to me at least – likely energised by his antipathy toward Facebook as much as his love for the US dollar.
As the week ends and I get ready for the next one I am left with on clear message – do not fight the tape.
For me it is as simple and as difficult as that as the S&P end’s the week above 3000, as the Dow passed 27,000 and as 10 year Treasuries climbed back to 2.10%. Not to mention the USD coming under a little pressure once more and oil trying to break out. But honestly, after whatever size this USD reaction is do you really want to own Euro? Anyway, the other big play at the moment is is gold, the little engine that might. If it can get through resistance at $1439/45 – until then though…
This is a TINA and FOMO markets with central bank distortions and promise of backstops. The prices of many assets will look over done, maybe even ridiculous. But this is a don’t fight the tape market unless you can take a long term ultra-macro view view of things.
Not too many of my readers have that luxury – so I’ll deal with the here and now and hopefully we can trade the market in front of us and bailout at the right time. Whenever that might be.
Now for the week ahead, let’s dive in.
Key Themes driving markets
The Fed’s narrative has emerged and rate CUTS are definately coming
Last week I borrowed ForexLive’s Adam Button’s comment that “marekts wanted rate cuts not jobs” as a lead into the weekly. This week I’d have to say the Fed has signalled that markets can have both.
That is a potentially powerful aphrodisiac for stock market bulls, will keep the front end of the curve anchored and mitigates the impact of longer bonds reacting to the Fed’s attempts to get infaltion moving higher again.
The reason I’ve come to this view is that it was clear in Chair Powell’s testimony this week that the non-Phd economist in the Chiar’s seat at the Fed reckons the models are wrong. He did that by saying the relationship between infaltion and unemployment has been getting “weaker and weaker” over the years and as such he went on to say:
“We’re learning that interest rates — that the neutral interest rate — is lower than we had thought and I think we’re learning that the natural rate of unemployment is lower than we thought. So monetary policy hasn’t been as accommodative as we had thought.”
As I highlighted in Friday’s newsletter, there is a bit to unpack in that short statement.
The first thing is that he is saying the pointy headed Fed Phd’s and their models have been wrong about the relationship between unemployment and inflation. Effectively they’ve been too paranoid the one leads to the other in a material way.
As a result of that the second he is saying the fear of inflation has been utterly overblown and thus policy has been driven by the wrong framework. And, finally, in using the word accomodative (which is how I reckon he’s really popped the Phd’s) he is saying that the Fed thought it had a set of rates that were consistent with the expansion continuing – it wasn’t trying to slow the economy – and now finds that it has over tightened.
Mr and Mrs market are looking on with a few “I told you so’s”. But the point is it utterly reinforces the July cut and another after that regardless of the stregnth of the jobs market.
That was something fresh last week.
Powell was joined by a Conga line of Fed officials saying the time is either here or near for rate cuts. Neel Kashkari wants to shock the system, Charles Evans reckons the time is ripe to move, we already know James Bullard voted for a cut. We had Lael Brainard opening the door, John Williams, Thomas Barkin, Patrick Harker too in varying degrees.
It’s not a unaminous voice of course on rate cuts but the narrative is that with inflation not an issue and at risk of staying too low, even with the strong economy policy can be cut because it is simply tighter than the Fed thought it was. So, in order to extend the expansion rate cuts are coming.
No wonder stocks like it – very goldilocksy and certainly reinforces downward pressure on rates across the globe. Especially with Madame Lagarde phoning in her ECB outlook with the IMF’s entreaty for Europe’s central bank to get busy with more stimulus.
TINA at least, probably FOMO too will reverberate across markets folks.
10’s have now broken higher – 2’s not yet
Powell testimony certainly suggested a July cut of 25 points was a lock but neither he nor any of his colleagues outside of Neel Kaskari are suggesting a 50 point cut. But, whereas the jobs data evaporated expectations of the bigger cut at the end of the month Powell’s testimony has it back around 22.5% at the end of the week.
By December though there has only been a 5% shift to a more dovish outcome than the majority which holds 150-175 bps or 175-200 bps as the most likely outcome for Fed funds after the December 19 meeting.
Even that though is 3-4 cuts. Quite aggressive if the Fed is saying the economy is still doing okay. And that’s helped to keep the US 2 year Treasury from breaking out in a way the US 10 year has. Though as you can see below the 2-10 curve is back at 27 points toward the higher levels we’ve seen on the spread this year and since last year’s market funk.
Indeed the last 2 week’s candles on the 10’s suggest a move back to 2.24/25%, and if that level doesn’t hoold then 2.33%. At present I’d be a buyer at 2.33% if we see a liquidation event that gets 10’s to that level. On the 2’s it’s still the 1.93/94% region which is key. A move above here and I’d be looking for 2.10/15.
As with last year a break higher in the 10’s could presage trouble ahead for stocks and that may be the case this time should the bond selling intensify. But chair Powell and his colleagues are trying to avoid that by saying they’ll cut even with a strongish economy (2% growth is not terrible, but neiter is it great).
Something to watch though because it would be a surprise for this gap between the blue (S&P 500) and the black line (US 10 year Treasury yield) to close without some sort of stock participation.
Bit of Ad – Where is the system at presently with regard to positioning
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Anyway, as you know, I write a lot of rhetorical stuff each day and each week. But the MACD system along with the moving average cross overs, is the basis of my trading. The current positions and signals for Monday are below. As I say, it is not always right. But it works pretty well and subscribers get it every day by 9am Sydney.
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Trusting the JimmyR, stocks still rising
There is really only one thing that matters in this “don’t fight the tape market”, the uptrend on the weekly and daily charts seems intact when it comes to the S&P 500 (as the bellwether for global stocks).
As I have continued to highlight recently my JimmyR is still pointing higher on the weekly charts. 2898 is support on the weeklies while on the dailies support for the S&P 500 is at 2974 and 2940/45. And now we’ve had the topside a break in recent week the the way is open for a run at 3040/50 as a daily FIbo projection.
Indeed on a long term basis the receent weekly price action while above the supports at 2940/45 and then 2900 a target of 3300 is in the frame. I know, mad. But that’s based on the first ever system I traded and is of course long term.
You would need to see the support levels identified break to open up the downside.
I’ll update the levels and view as we progress through the week for subscribers. And I’ll deal with individual markets in depth for subscribers Monday. In the meantime though it is worth noting that other markets around the world are lagging. The Nikkei trendline I noted last week still hasn’t given way and the DAX in Geramny had another down week. That’s interesting – especially from a forex point of view potentially.
The DAX needs to stay above 12100.
Fed speak hit the dollar but really, Euro, Yen, and Sterling?
The reason I say that the out performance of US asset markets may ultimately be important for forex is that if US markets stand out for returns then we’ll be able to hear the sucking sound from my place which is 7700 kilometres from Tokyo, almost 16000 kilometres from New York, and 17,000 to London.
That might be for another time though, because traders have really reacted to the dovish rhetoric coming from the Fed it seems. That has seen the USD reverse and print a somewhat bearish candle and reversal. I say somewhat because let’s face it USD – in DXY terms is in a 95.00/98.50 range while Euro is essentially 1.1100/1.1450.
But in the same way we shouldn’t get too excited about the USD, Euro, and many other pairs because they are essentially in arange it’s also realistic to wonder how the USD can really weaken when the monetary settings across the globe are moving further toward easing.
And that reality helps explain exactly why there is so much range trading going on. The Fed may be more dovish but so too is the ECB, the RBA, the RBNZ, the BoC, even the BoE now. And of course the BoJ has promised stimulus to the end of time – okay not quite, but at least till its no longer required which is likely to be longer than it takes to own every marketable asset in the country.
We’ll just keep trading the range in DXY, EURO, Aussie and other pairs unless or until they break. But as you’ll see in the CFTC data below the pressure might be building for a small USD reversal to take us to the outer edge of the range if the move in past week and that weekly reversal in the DXY is any lead.
That said folks, respect the ranges unless and until they break. That’s the way I always play it. .
The CFTC data shows a market still long of US dollars and short the pairs against it. With the Pound weakneing to the bottom of the range and then finding support during the week that may offer a pressure point. Likewise should the Aussie be able to best the 200 day moving average at 71 cents we could see some position squaring.
In the absence of something to dissaude traders of the Fed’s cut looming at month end the pressure may be on the USD till then. Thus the pressure point in terms of positioning.
The week ahead
Earnings kick off this week in the US which makes it a big one.
Other than that though, it is a big and tantalising start to the week with a massive data dump out of China Monday with the release of Q2 GDP, industrial production, retail sales, fixed asset investment, and associated metrics like capcity uilisation and the like. After the trade data Friday which suggests there may be some slowdown in China this data dump will be watched closely.
The NY Empire Fed manufacturing index is out in the US and NY Fed president John Williams will be speaking.
Something I’ll also be watching closely is whether ther is any progress on the trade talks or whether, as I believe they are now intractable. We are hearing that US businessfolk are being detained and we have the Chinese blowing up about US arms sales to Taiwan.
Something to keep an eye on tho0ugh it’s probably not a market mover yet.
Tuesday sees the relase of the RBA minutes to this months rate cut meeting decision, UK employment data, EU trade, and the EU and German ZEW sentiment indexes. Italian inflation is out and then we get the big one in the release of US retail sales for Jun along with import and export prices for the US. Industrial production, business inventories, and the NAHB hosuing market index are also out in the US and we get a speech from Fed chair Powell and his colleague from Chicago Charles Evans. API data on crude inventories is out after the bell.
Wednesday sees the release of Westpac’s leading indicator for Australian growth, we’ll get inflation data in the UK, Europe, and Canada – HUGE FOLKS. In the US it’s building permits, EIA data, and then the Beige booko in the run up to the EoM FOMC meeting.
Thursday sees the relase of the Japanese tankan survey, BoK interest rate decision, and Australian employment. UK retail sales are out as are jobless claims and the Philly Fed in the US. NYFed’s Willaims is speaking again.
Friday kicks off with South Korean PPI, Japanese inflation and then German PPI . Canadian retail sales are out as well as Michigan consumer confidence in the States as well as a speech from Fed dove Bullard while his colleague eric Rosengren from Boston is also out on the hustings.
@gregorymckenna on Twitter
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