The market is continuing to look for that somewhat elusive inflation beacon and from a US standpoint, today’s Non-Farm Payrolls will be next to watch as we wait to see whether earnings growth can get a three handle. Adding a little more softness that ensued after the FOMC announcement yesterday (signalling some tolerance for inflation overshooting 2% for a time), the USD has ahead of payrolls been pulling back further in something of a choppy trading session for currencies and risk asset markets, equities lower in Europe and mixed in the US with the Dow virtually steady but the S&P and Nasdaq marginally lower. Oil prices made some gains, as did gold, but base metals were mostly lower.
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In the currency space, if there has been any out-performer it has been the yen, Dollar Indexes lower, the Euro and Sterling also struggling for traction. The AUD trades this morning at 0.7536 after the RBA’s latest set of inflation, growth, and Unemployment forecasts.
Both the Chinese and US sides are remaining tight-lipped on the progress of trade talks this week in China as the White House team of Mnuchin, Ross, Lighthizer and Kudlow meet with their Chinese counterparts. While both sides have expressed the willingness to engage and talk, each has their own positions and priorities. As one analyst reported this morning, weekly data from the US Department of Agriculture showed Chinese traders are already shunning American soybeans, having cancelled some import commitments, opting to buy more from Brazil instead. Expectations are low for a break-through in negotiations. Earlier in the week President Xi said that China must firmly control major technologies and rely on domestic innovation, suggesting that the country won’t accept US preconditions for negotiations.
The US goods and services Trade Balance for March came in at a lower deficit of $49bn, broadly in line with expectations given the already released goods-only balance. The report though did reveal the deficit with China widening by 16% y/y to $91b for the March quarter. Exports rose 2.0% while imports fell 1.8% after previous strength, those rises perhaps to beat tariff increases.
While the US Trade report was close to expectations, the US ISM Non-Manufacturing report for April was slightly shy of expectations, but the prices paid component remained high. The headline Index came in at 56.8, down from 58.8, the market expecting 58.0. The prices paid component rose 0.3 points to 61.2, resonating with prices paid in the Manufacturing release that rose 1.2 points to 79.3. While businesses were reporting labour shortages and rising steel prices, the follow through from the Q1 first cut of US unit labour costs also showed some rise to 2.7%, up from 2.1% though shy of the 3.0% tipped and with Q4 revised down from 2.5%. It is still very much all to play for on the inflation front in the US, the market now to fixate on this afternoon’s April payrolls report, especially for the growth in average hourly earnings. I still have resonating in my ear, ex-Fed Vice-Chair Stanley Fischer’s signpost of 3% growth in wages as a clearer sign of inflation being more on track to a sustained 2% path. Remember that the Fed is behind on its longer term inflation run rate, the PCE deflator having averaged 1.5% for the past eight years.
While the US Dollar struggled for traction, the Euro was not being bought either. Euro-Zone CPI for April undershot expectations, headline CPI at 1.2% down from 1.3% (and expected 1.3%). Core CPI was the really big surprise coming in at just 0.7%, the equal lowest since March 2017 and well down on last month’s 1.0% and a material miss on the 0.9% consensus. ECB Chief Economist Peter Praet (a close ally of Draghi) pushed the low inflation story further. He said that inflation conditions remain subdued and the Governing Council has not yet met the three conditions – convergence, confidence, and resilience for a sustained adjustment in the inflation path, which is their stated condition for ceasing net asset purchases.
This morning on the Economic Front we have German and Euro-Zone Markit Services PMI at 8.55 am and 9.00 am respectively. This is followed at 10.00 am by Euro-Zone Retail Sales. At 1.30 pm we have US Non-Farm Payrolls which are expected to print at 192K, the Unemployment rate at 4.0% (down from 4.1%) while average hourly earnings to print at 0.2%/2.7% after 0.3%/2.7%. Can it get anywhere near three? Finally the Fed’s Dudley and Williams are speaking at 5.00 pm and 8.00 pm respectively.
June S&P 500
My S&P plan worked very well yesterday on another wild trading session as the market rebounded strongly after breaking its 200 Day Moving Average. After the S&P hit my initial 2613 buy level we bounced 10 Handles and I used this rally to cover my long position at my revised 2618 T/P level. Subsequently the S&P fell to a low at 2591.25 before rallying over 40 Handles in what turned out to be a Key Upward Reversal. For the record I bought the S&P again at 2600 but because I had so many open positions I covered this trade at 2601 and I am now flat. Even though long-term I am bearish of the US stock market it is extremely difficult to be short as the ‘’buy the dip’’ will not let go and is why I have only really been a buyer of the stock market over the past two months. Today I will again look to buy the S&P on any dip lower to 2605/2615 with a 2598 stop. I will still be a small seller on any rally higher to 2654/2664 with a 2671 stop.
EUR/USD
Shortly after I posted the Euro made a rebound high at 1.2009 which just missed my 1.2015 T/P level. Subsequently the Euro traded lower/sideways for most of the session before the Euro rallied again over 1.20 and I emailed my Platinum Members to exit at this level. I am surprised that the Euro has not rallied further given how oversold we are trading. If we get a weak NFP today then the Euro will rally. This morning I have bought the Euro here at 1.1960 and I will only add to this position on any move lower to 1.1910 with a 1.1870 stop. The Euro has strong support at 1.1930 and a break and close below here targets the 1.1750 area while a break and close over 1.2020 is bullish for 1.2070/1.2120 and possibly 1.2170/1.2210. However ahead of the NFP data I will try and use any rally to exit this long position and if this happens I will be back with a new update for my Platinum Members. For now my T/P level will be 1.1980.
June Dollar Index
I am still flat the Dollar and today I will raise my sell level slightly to 92.80/93.20 with a 93.55 stop. I still do not want to be long the Dollar at this time.
June DAX
My DAX plan worked well with the market eventually trading lower to my 12690 buy level before rallying 100 points on the rebound in the US Indices. As I had so many open positions I covered this long DAX too early at 12695 and I am still flat. Today I will again be a buyer on any dip lower to 12590/12660 with a 12535 stop. I still do not want to be short the DAX at this time especially after Wednesday’s break and close over the 100 and 200 Day Moving Averages.
June FTSE
The FTSE just missed my 7520 sell level with a 7519 high print overnight before having a nice sell-off and I am still flat. Remember the London Markets are closed on Monday so be careful if you get caught with a position at close of business this evening. Today I will raise my sell level slightly to 7540/7575 with a 7605 stop. Given how overbought the market is trading I still do not want to be long the FTSE at this time.
Dow Rolling Contract
Wow what an incredible last 48 hours for Dow trading. Thankfully no matter where you bought the Dow yesterday you should have made some nice gains as thankfully the low for the Dow was at 23530 which was just above the 23520 stop mentioned in yesterday’s commentary. Subsequently the Dow rallied 470 points off this low to a rebound high at 24000 before selling off small into the close. The market is doing everything in its power to hold the 200 Day Moving Average which sits at 23720 this morning. For the record I bought the Dow at 23732 before exiting this position at my revised 23785 T/P level and I am still flat. Today I will again look to buy the market on any dip lower to 23580/23730 with a 23495 tight stop.
June NASDAQ
My NASDAQ plan also worked well with the market trading lower to my 6560 buy level before rallying to my 6595 T/P level and I am now flat. Today I will again look to buy the market on any dip lower to 6510/6560 with a 6465 tight stop. Despite the negative price action following the strong earnings over the past 10 days I do not want to be short the market at this time.
June BUND
After the Bund traded higher to my initial 158.95 sell level I emailed my Platinum Members to exit any short position at my revised 158.87 T/P level and I am now flat. This was a good decision given the subsequent move higher but I still believe that the upside is limited from here given the insanely low yield on the Bund at sub 50 basis points. Today I will again look to sell the Bund on any move higher to 159.65/160.05 with a 160.35 stop.
Gold Rolling Contract
Gold managed to rebound off its 200 Day Moving Average at 1303 as we railed over 1315 before selling off small this morning. Today I will leave my buy level unchanged at 1290/1298 with the same 1283 stop.
Silver Rolling Contract
No change as I am still a buyer on any dip lower to 15.95/16.30 with the same 15.60 stop.
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