The US Dollar is softer (hence Euro higher) and, following the conclusion of Fed chair Jay Powell’s inaugural press conference, bond yields are slightly lower. If one reason for this is the failure of the ‘’median’’ Fed dot for 2018 to rise from 3 hikes to 4, then this is arguably an unjustified reaction. The ‘’mean’’ of the now-15 FOMC member projections rose by 18bps and three of the four matched sample members who were indicating 3 rate rises in December are now at 4. For 2019, 3 rather than 2 rate rises are indicated and for 2020, 2 rather than 1.5 (the latter the literal interpretation of the prior median dot).
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The Fed has upgraded its projections for growth this year and next, by 0.2% and 0.3% respectively, to 2.7% and 2.4% with the fiscal stimulus implied by the December tax cuts and February spending increases clearly figuring in the Fed’s upgraded outlook, alongside acknowledgement in the Statement that the economy ‘’has strengthened in recent months’’ and which figures in the latest post-meeting statement. Unemployment is now seen falling to 3.8% this year (3.9% previously) and 3.6% in both 2019 and 2010 (from 3.9% and 4.0% previously). These numbers are almost a full percentage point below the Fed’s latest estimate of NAIRU (4.5% down from 4.6%).
In his press conference, Mr Powell sounded optimistic on productivity improving, in part as a result of the impact on the tax cuts in both stimulating more business investment and incentivising more people to re-enter the workforce. We will have to wait for the minutes of today’s meeting, but this may lie behind the FOMC decision to lift the ‘’longer run’’ median dot by 1/8% from 2.75% to 2.875%.
Mr Powell sounded much less concerned, when asked, about the risk of fiscal stimulus overheating the economy and the Fed having to tighten policy to the point it risked tipping the economy into recession. He noted that the 2020 ‘’dot’’ was only 40bps or so above the longer run dot. Some note can be made too of the new inflation projection showing core PCE rising to 2.1% in 2019 and 2020 (from 2.0%) and headline to 2.1% from 2.0% in 2020. This may be a sop to the Fed’s declared intent to treat the 2% inflation goal as symmetric. If so, perhaps the implied willingness to project and so tolerate – a period of above-target inflation, accounts for the more considered US Dollar negative/lower bond yields market reaction?
Outside of the Fed, a few things going on of note:
Oil is up $2 or more (Brent +$2.44 to now just shy of $70 once more, WTI +$2 to $65.50) on news reports that the American Petroleum Institute calculates a big draw in crude stocks last week against expectations for a significant build. Let’s see if that’s confirmed in more official figures later today.
The British pound found support from stronger than expected average earnings growth in the latest labour market statistics, to 2.8% in January (3m y/y) from an upward revised 2.7% and versus 2.6% expected. The market now awaits hints from the bank of England this afternoon that a May rate rise is to be expected.
Trade protectionism news is mixed. There are reports that the EU and Argentina could, for the time being, be exempted from steel and aluminium tariffs due to come into force of Friday alongside Australia, Canada and Mexico. On the negative side, the Wall Street Journal reports that China is prepared to retaliate against US import tariffs with a ‘’measured and proportional response’’ depending on how broadly-based US tariffs are. According to sources, China seeks to avert tariffs by warning of possible repercussions and offering incentives to the US including better access to China’s markets, especially in the financial sector. The White House plans to announce new tariffs against China later this week (quite possibly tonight).
This morning on the Economic Front we have German and Euro-Zone Manufacturing/Services PMI at 8.30 am and 9.00 am respectively. Also at 9.00 the ECB will publish its latest Economic Bulletin and the German IFO Survey will be released. This is followed at 9.30 am by UK Retail Sales. At 12.00 pm we have the Bank of England Rate decision where I expect rates to be left unchanged. The key issue is whether they signal a rate rise in May. Next at 12.30 pm we have US Weekly Jobless Claims and this is followed at 1.45 pm by Manufacturing/Services/Composite PMI. Finally we have the Kansas City Fed Manufacturing Index at 3.00 pm.
June S&P 500
My S&P plan worked really well with the market trading higher to my 2744 sell level which was the high of the day before selling off aggressively and this move lower enabled me to cover this short position at my 2737 T/P level. Earlier this morning the S&P traded lower to my initial 2705 buy level but as I wanted to be flat to concentrate on my Daily Commentary I emailed my Platinum Members to exit this trade for a breakeven. I do not like the price action in the US stock markets but as the last few weeks have shown it is extremely difficult to stay short given the mentality of traders buying every dip in the market. The PBoC just announced a rate rise of 5 bps which is probably the reason for this latest sell-off in the market. The S&P has strong support at 2690 and a break and close below here will see the market accelerate to the downside. Today I will be a small buyer on any further dip to 2684/2694 with a 2677 tight stop. My only interest in selling the S&P is on a rally higher to 2725/2735 with a 2742 stop.
EUR/USD
Overnight the Euro ha surprisingly traded higher to my 1.2365 sell level. I am still short and will only add to this position on any move higher to 1.2410 with a tight 1.2430 stop. I will now raise my T/P level on this position to 1.2345. If this happens I will be back with a new update for my Platinum Members.
June Dollar Index
My Dollar plan worked well but you had to be quick as shortly after the Dollar traded lower to my 89.50 buy level the market rallied to my revised 89.65 T/P level and I am now flat. I am surprised by the renewed Dollar weakness especially given the large difference between European and US Interest Rates which would normally be Dollar supportive. Today I will again look to buy the Dollar on any dip lower to 88.30/88.70 with a 87.95 tight stop.
June DAX
My DAX plan worked well with the market trading lower to my 12230 buy level before having a nice 70 point rally. As I wanted to hang on to yesterday’s gains I covered this long DAX position at 12245 and I am now flat. The DAX continues to trade better than the US Markets despite the stronger Euro which is a surprise. This market continues to be a buy on dips and today my buy level for the DAX is from 12095/12160 with a 12040 stop.
June FTSE
The FTSE has so far this week being unable to break the 7000 resistance level for the June Contract. Yesterday the FTSE traded lower to my 6930 buy level before lunch and as I wanted to be flat ahead of the FOMC I covered this position for a small gain at 6943 and I am now flat. However given the large discount to the cash FTSE it is very difficult to be short the June Contract as both prices have to converge ahead of expiry on June 15. With this in mind I will now look to buy the market again on any dip lower to 6870/6910 with a 6830 stop.
Dow Rolling Contract
My Dow plan worked really well yesterday with the Dow trading higher to my 24950 sell level with a 24986 high print before trading to a 24524 low print so far this morning. This move lower enabled me to cover this position at my 24880 T/P level and I am now flat. Hopefully you were able to get a better fill given how fast the market moved lower. Today I will tighten my buy level in the Dow to 24370/24470 with the same 24310 stop. Given the extreme volatility I do not want to be short the Dow today especially as I have a higher sell level in the S&P.
June NASDAQ
I am still flat the NASDAQ and today I will now lower my buy level to 6750/6790 with a 6715 stop.
June BUND
The BUND is higher this morning on the back of the weaker equity markets and I am still flat. Today I will raise my buy level to 157.40/157.80 with a 157.10 stop. I still do not want to be short the Bund at this time.
Gold Rolling Contract
The weaker US Dollar saw both Gold and Silver rally yesterday. I still do not trust the Gold market which essentially has traded sideways for the past two months making it difficult to make any points in this market. Today I will move my buy level higher to 1310/1318 with a 1303 stop.
Silver Rolling Contract
I am still flat Silver which rallied after I posted yesterday morning. Silver has huge resistance at 16.90 and a break and close over this level is a major buy signal. As mentioned over the past few days support for Silver is at 16.09 and a break and close below here should see Silver trade lower to my 15.55 buy level. Just like Gold above it is difficult to trade a market that has essentially traded sideways for the past two months as we patiently wait for the next break-out in the market. Today I will move my buy level higher to 16.05/16.35 with a 15.75 stop.
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