The FOMC last evening announced as expected the formal start to winding down its balance sheet to commence next month. It left its Fed funds rate unchanged at 1-1.25%, also as entirely expected. While this starts another chapter in what has been a momentous decade since the Global Final Crisis, the market was also – perhaps more – attuned to the FOMC forecasts for the Fed funds rate and the economy that were not materially altered for this year and next. Market reaction has seen a relief rally in the US Dollar and a modest lift in Treasury yields.
To mark my 1425th issue of Tradernoble Daily Commentary I am offering a special 2 year rate of Euro 2750 for my Platinum Service which includes 1 to 4 updated emails throughout the trading day. This offer is open to both new and existing members and if anyone is interested can you please contact me on bryan@tradernoble.com for details.
For anyone following my Platinum Service it lost 3 points yesterday and is now ahead by 232 points for September, having made 1560 points in August, 1096 in July, 1023 in June, 1076 in May, 1375 in April, 1335 in March, 1481 in February and 1734 in January. Since I started this New Platinum Service in June 2015 it has averaged a monthly gain of over 1700 points.
Come next month, as the Fed’s holdings of Treasury and mortgage-backed securities mature, the Fed will allow these to run off their balance sheet, but up to stated monthly caps. As they communicated in June, those caps start for the first three months at $6bn/$4bn for Treasuries/MBS, then the caps rise each quarter until they reach $30bn/$20bn per month in a year’s time. There’s no active selling of securities per se, but a passive run-off of the Fed’s holdings. Yellen noted that the hurdle to the Fed changing tack with this programme is high. There would have to be a “material” or large change, the Fed resorting more likely to use rates.
As for the Fed’s dot point forecasts of its Fed Funds Rate, the median still has one more for this year taking it to the 1.25-1.50% target range (one bold member forecasts there will be two!) and three more next year that would take Fed funds to 2.00-2.25%. That was the expectation back in June and the US Dollar liked that. The median forecast at the end of 2018 was left unchanged at 2.125%, while it was lowered 25 bps for 2019 with one more hike expected after that in 2020. The longer term projection for the Fed funds was revised down from 3.00% to 2.75%, FOMC members down-scaling their expectations for what the neutral real Fed funds rate will be over the longer term. It is currently believed to be around zero in real terms which with a 1½% core PCE inflation rate would be a nominal rate of 1½%.
That brings into play where the Fed sees growth and inflation over the next year or two, driving those rate views. Growth for this year was shaved 0.2% to 2.4%, then running close to 2% for next two years. Unemployment was lowered by 0.1%, but so was inflation for next year to 1.9% after being expected to land at the end of the year at 1.5% (-0.2% off June’s forecast).
In her press conference, Yellen spoke about how recent inflation readings had been something of a “mystery”. She said the Committee does not fully understand why it’s remained so low, how much is structural, how much is transitory. The data will tell no doubt. She went on to remind the press conference that monetary policy acts with a lag and that wage and price inflation is still expected to rise. They also expect that over time, there will likely be some increase in the neutral rate requiring additional rate rises, as in their forecasts.
The US Dollar lost ground initially on the FOMC release, before turning around with the Dollar Index closing up 0.7%, with the Kiwi and Aussie outperforming, the former getting a boost after the Colmar-Brunton poll suggested the Nationals had regained the lead in the polls for Saturday’s election.
The commodity complex was mixed to higher yesterday, oil getting a boost from the news that gasoline stockpiles in the US are at 22m lows. Yellen also said that the Fed would look through the data impacts from the hurricanes and that they were not expected to affect longer term economic performance. The AUD is at 0.7950 this morning after testing 0.81 pre-FOMC.
In other news, UK Retail Sales in August were much stronger than expected, up 1.0% in August (+0.1/0.2E) supporting sterling before the FOMC.
This morning on the Economic Front, the ECB publishes its latest Economic Bulletin at 9.00 am and this is followed at 9.30 am by the UK Public Sector Net Borrowing and Finance Loans For Housing. Next we have the US Weekly Jobless Claims and the Philly Fed Business Outlook. At 3.00 pm we have Euro-Zone Consumer Confidence and US Leading Index. Finally at 5.00 pm we have US Household Change in Net Worth.
Meanwhile at 2.30 pm ECB President speaks in Frankfurt.
December S&P 500
I am not having much luck this month with my calls with the S&P missing my 2494 buy level with a 2494.25 low print before having a nice 14 Handle rally into the close and I am still flat. With the Fear & Greed Index closing at 81 last night this indicator is telling us to be on high alert for a decent correction. When you see that volume has been declining on the recent move higher in the S&P, this is another warning sign as volume should lead price and this is clearly not happening. On top of all of this, the VIX broke and closed below 10 for the first time since May with a 4% fall to close at 9.78. Today I will lower my S&P sell level slightly to 2514/2523 with the same 2528 stop. I do not trust this market despite the late reversal after Yellen’s press conference and I will now lower my buy level to 2482/2488 with a 2477 stop. Again if I am taken long and subsequently stopped out of this position I will be a more aggressive buyer on any further dip lower to 2461/2467 with a 2456 stop.
EUR/USD
The Euro had a significant Downside Key Day Reversal yesterday with the Euro spiking to a 1.2035 high post the FOMC before falling on one large red candle to a 1.1861 low print from where the market is trying to stabilise. I have no idea what members did yesterday as it is the norm to stay flat into a major event like the FOMC, in this case you stayed flat as my buy level and stop were hit before Yellen finished her press conference. Personally I bought the Euro at the bottom of my buy range at 1.1910 before getting stopped out of this position a few minutes later at 1.1875 and I am now flat. My own view is reducing the balance sheet will put more pressure on the US economy which I believe is not as strong as most analysts believe and that once the market crashes we will have more QE. We still have to witness the devastation from the three hurricanes on the US economy. The Euro has strong support from 1.1735/1.1780 and today I will be a buyer in this area with a 1.1690 stop. Despite yesterday’s KDR I do not want to be short the Euro at this time.
December Dollar Index
Frustratingly the Dollar just missed my 91.00 buy level with a 91.21 low print before rallying over 140 points which is huge move for the Dollar. This move resulted in an Upside Key Day Reversal. Today I will now move my buy level higher to 91.50/91.90 with a 91.20 stop.
December DAX
Shortly after I posted the DAX fell to a 12500 low print before rallying strongly on the back of the weaker Euro and I am still flat. Thankfully we have had no sell levels in the DAX over the past few weeks as one resistance after another gets broken in what has been a relentless move higher since we bottomed over two weeks ago at 12030. Until we get a sell signal then the downside will be limited. Today I will now raise my buy level to 12470/12520 with a 12430 tight stop. The next major resistance for the DAX is at 12710/12760 and I will be a small seller in this range with a 12810 stop.
December FTSE
The FTSE also just missed my 7185 buy level with a 7205 low print before following the other markets higher after Sterling started to weaken following the FOMC Statement. I am not going to chase this market higher and today I will leave my buy level unchanged from 7150/7185 with the same 7120 stop.
Dow Rolling Contract
Sentiment remains at extreme levels for US Stocks, with the Market Vanes Bullish Consensus at 71%, which is the highest percentage of stock market bulls since June 5, 2007, when the financials peaked and started an 85% crash to March 2009. Meanwhile the Dow has now closed higher for nine straight days and 10 out of the past eleven. The nine consecutive closes is the longest streak since the 10 straight closes that ended on August 7. The intra-day high was made the next day and this was followed by a 580 point fall in the Dow to the low on August 21. Another hint that we may finally start to see a correction is the McClellan Oscillator which fell again yesterday to close at a still positive 87 print. This should not be happening if this is a healthy market while the NASDAQ continues to struggle since Apple launched its 1Phone 8 last week. When the US markets reopened last night the Dow traded higher to my second sell level at 22430. As I wanted to make up for my earlier Euro loss I covered this position at 22398. I am still short my original tiny 22030 position and today I will add into this trade with a more aggressive stance on any further move higher to 22455/22510 with a 22570 stop. There is a minor trendline at 22460/22470 which hopefully will contain any further advance.
December BUND
I am still flat the Bund and today I will now raise my buy level slightly to 160.30/160.65 with a 159.95 stop.
Gold Rolling Contract
As expected Gold got hit hard yesterday as flagged in yesterday’s commentary by the Commitment of Traders Report. I am still flat and today I will continue to look to buy Gold on any dip lower to 1275/1283 with the same 1268 stop.
Silver Rolling Contract
I am still flat Silver which like Gold is finally selling off as indicated by the latest Daily Sentiment Index readings. Today I will leave my buy level unchanged from 16.60/16.85 with the same 16.30 stop. If I am taken long and subsequently stopped out of this position I will be a more aggressive buyer from 15.95/16.25 with a 15.60 stop.
Recent Comments