The Fed, the Dollar, Stocks, Bonds, and RBA – McKenna Macro Markets Weekly

on February 3, 2019

Welcome to McKenna Macro Markets Weekly

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Key Takeaway

Oil is the standout this week as the Venezuelan situation, reduction in US rigs, ad Saudi resolve to lower production combine to tighten the market. That’s got WTI and Brent right back at resistance – on the cusp of a very serious extension to the rally, or a retracement of same.

We’ll see this week.

Stocks too are still bid as this exhausting rally rolls on. The ASX, SPI, and DAX stalled – but the FTSE looks solid as do the S&P, Nasdaq, Russel, and Dow.

I am waiting for the sell signal – though besides the SPI I haven’t seen any yet on stocks.

The Aussie is also higher too.

Of course the narrative that draws oil, stocks, the Aussie, and bond rates together is the risk appetite increase we’ve seen as a result of the Fed’s back flip and the soothing noises coming from beijing and Washington over trade. They want to do a deal – but can they.

Key Themes driving markets

The Fed might be on hold but the economy is not terrible

The Fed Put – sorry Powell Put – is alive and well.

Robert Kaplan and James Bullard are also out their waxing lyrical about no change in monetary policy for at least the first couple of quarters of 2019.

That means traders could ignore the 304,000 jobs that were created in January. Even though after the 70,000 reduction from the previous months original release that still makes for more than 500,000 jobs created in the United States in the past two months – just as the Fed was panicking and changing the goal posts.

Indeed whereas the fed had been previously concentrating on the economic conditions it has switched gears and – according to Fed Chair Jay Powell last week – been focusing on financial conditions.

Note to Mr Powell and his colleagues – a weaker USD and a big bounce in risk assets has rewound a lot of that.

But that’s the key isn’t it. The Fed blinked so hard and fast the markets are now convinced their bearishness about the outlook for the US economy is the right view to have. That these employment data are backward looking, that the US government shutdown has harmed growth, the trade war too.

All the while the Citibank Economic surprise index for the United States is still the best on the planet – that’s helping stocks  and its pushed bonds up a little.

Maybe the market will be right, maybe the Fed’s U-turn is the right one. As you know I advocated for a pause – along the lines of RBA protocols – in late 2018. But for the moment all we are left with is the implication the Fed has blinked and any fall in stocks takes primacy over all other indicators in the economy.

In that sense Powell is not the refreshing change many of us thought he would be.

That’s keeping the US dollar bid, well okay – range bound.

That Powell put reverberated in forex markets too but its impact was tempered by the fact that growth outside of the United states is still moribund as German retail sales, EU and Italian GDP, as well as a raft of PMI’s showed last week.

You may think the USD should fall – but it’s stuck in a big old range because the data just hasn’t supported the many pundits notions that US growth will fall in a heap. Indeed the New York Fed puts its Q1 GDP nowcast up to 2.4%.

US growth may well slow – but this is still a least ugly contest and Italy is in recession and the EU growth profile – and societal constructs – are in peril as we head toward the May EU parliamentary election. Not to mention the chance of an accidental hard Brexit.

So, looking at the weekly chart below I’d say the DXY ( and thus the Euro and others) remains constrained by the overhead resistance at 97.7/97.90. Resistance at previous support trend line comes in at 97.20/25 and only a close above their reopens the topside. Support 95.00, 94.50, and 93.75.

MACD pointing lower though overall trend indicators still pointing higher. Rangebound!!!

I’ll make you 93.70-97.70 and trade the range when it breaks – I favour topside by the way. I’m a USD bull.

DXY Weekly – Trading View

THE BOND CURVE – Something for the the hand wringers

We’ll all be ruined they cried. The economy is collapsing they said. The Fed has never paused without dropping rates, they wrote on twitter. The 304,000 jobs growth in January is bunk. And, in a complete narrative shift from the curve flattener signals recession we’ve recently heard they it’s the steepen er that is the worry.

Seriously folks, I’m not cut out for this world of histrionic headlines and calls on Twitter to get clicks and views and flog a service. But they influence the narrative.

What’s important is that you understand these folks shift their narrative so as never to be wrong. Me, I’m often wrong. But I’ve prospered for 30+ years by acting on my wrongness and dealing with it honestly.

Anyway, I raise this because as you’ll see below (top segment curve, middle 10’s, bottom 2’s) the narrative that said the curve will kill us – when the Fed said it was technical factors. has now morphed into the steepening curve will kill us. As you can see though the curve looks like it may have bottomed – but it’s hardly steepened.

So ignore the hand wringers – and trade the market in front of you.

Ultimately the curve will steepen again – as I wrote last year when the hand wringers were focused on the flattening. But much water will flow under the bridge before then and having a fixed position as if you know the outcome with certainty can destroy your equity – even if in the end you are right.

US 2’s, 10’s and the curve – TradingView

And stocks are bid, back at the long term trend line

It’s always a bit dodgy – at least in my mind – to fit a linear trend line to a time series. That’s the case whether it’s long or short.

The reason for that is as the price moves up, or down, so the slope of the trend line is impacted.  But that said, what do you see when you look at this chart of the S&P 500 against the LT trend line and the 200 day moving average?

S&P 500 with trend line and 200 day moving average

Let me tell you what I see. I see that periods of market funkiness – like we have just bee through like we saw in 2011/12, 2015/16, and more recently often include a retest of the trend line before the bottom is formed and the uptrend actually resumes.

So, even though I don’t have a sell signal yet on the pretty much anything other than the SPI 200 and ASX. I’m on the look out for a turn in sentiment and the technicals. Not preempting it yet, I have to see the MACD – in particular – turn. But I’m watching closely.

Maybe it’s 2,750, maybe 2,800, or 2,823 – I’m not sure. But a turn will come.

The RBA is central bank of the week

The RBA board meets Tuesday and we’ll see the Governor’s statement on why they – as expected – left rates at 1.5% at 2.30 pm Sydney time. We’ll then hear from Governor Lowe in a speech Wednesday and the  the quarterly Statement on Monetary Policy is out next Friday morning.

So, by the end of the week we will be in no uncertainty – or we shouldn’t be, this isn’t jay Powell after all – as to what the RBA thinks and plans to do.

There are many, myself included, who think the RBA should take out a bit of insurance and maybe cut rates to sure up confidence in the economy as house prices fall sharply – and at an accelerating rate i Sydney and Melbourne – and as Business Conditions in the NAB business survey collapse.

House prices and credit creation (ex-refinancing) – Curve Securities

I will grant you that the house price fall is exactly what the RBA and APRA wanted – they engineered this after all. And they should be congratulated for that because in a world of short term societal, markets, and political focus Australia’s Council of Financial Regulators clearly made the decision to play the long game.

Short term pain for long term financial stability and affordability for those who want to live in thier property – not just investors.

But the question is whether things are getting away from them. I think they are. And while I note that I’m not convinced a rate cut would actually achieve any last benefit for the economy. It might actually stop the rot – or slow it.

And to this end Stephen Koukoulas  has penned an imaginary piece on what Governor Lowe should say in his speech this week. here’s an excerpt;

“The economy has not performed as we were expecting.

This is not to say that the economy is entering a period of trouble, far from it. But the economy is falling short of the optimistic outlook the RBA held for the bulk of the last year. The main areas of surprise are related to the housing downturn, both in terms of house prices and new construction, and the flow through of these trends to household consumption spending.

In addition to weaker than forecast GDP growth in the September quarter, the severity of the housing downturn is forecast to reduce GDP growth in 2019 and 2020. The downward revision to the forecast for household consumption growth is not being offset by unexpected strength elsewhere, hence the material change to the Bank’s overall growth outlook.”

I couldn’t agree more – but given RBA Board member Ian harper said last week things were fine. Given former RBA Board Member John Edwards echoed those thoughts there is every chance the RBA, the board, and the Governor actually spout the message that, “she’ll be right”.

She won’t be, housing is going to drag on domestic consumption at a time of slowing Chinese and global growth. But the RBA may not acknowledge that it yet needs to do anything.

Either way its a big week for the Aussie dollar, bonds, and stocks. Not least because the report of banking Royal Commissioner Ken Haynes is to be released after the bell Monday afternoon.

The week ahead

The RBA is huge this week – Tuesday, Wednesday, and the SoMP on Friday. If we are confused at the end of this week then they are as bad as the Fed in making their point. But I doubt it. She’ll be right 🙂

Australian trade and retail sales are also out, there is a raft of services PMI’s, Canadian trade, President Trump’s State of the Union, Kiwi employment, Chinese reserves (apparently) German Industrial production and of course the bank of England gets to wax lyrical on rates and policy amid the debacle that is Theresa may and her Conservative party colleagues trying to run down the Brexit clock to get what they want.

Japanese and German trade is out and don’t forget the US will continue to try to play catch up on the data front and China is out for the week.

新年快乐 / 新年快樂

It’s a big week, enjoy.

It’s a big week, enjoy.

Have a great week

Greg McKenna
@gregorymckenna on Twitter
In collaboration with SMART Markets..

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Greg MckennaThe Fed, the Dollar, Stocks, Bonds, and RBA – McKenna Macro Markets Weekly