The jump in US annual average hourly earnings in January, to 2.9% from an upwards revised 2.7% in December, stole the limelight on Friday albeit there were a number of extenuating circumstances suggesting the number should not be taken completely at face value. Together with a 200k headline Non-Farm Payrolls print (but with net negative revisions) and unchanged 4.1% Unemployment rate, the data served to ratchet up 10 year Treasury yields, the latter freaking out stocks. The higher yields/risk negative tone propelled an across-the board extension of a nascent early-week USD recovery, led by more AUD weakness. AUD/USD ended the week 2.2% lower at 0.7931, half a percent more than any other G10 currency.
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For anyone following my Platinum Service it made 223 points on Friday and is now ahead by 255 points for February having made 879 points in January, 946 points in December, 823 points in November and 657 points in October. Since I started this New Platinum Service in June 2015 it has averaged a monthly gain of over 1600 points.
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At 2.9%, US average annual earnings are now growing at their highest since June 2009. The jump in the y/y figure was mostly due to revisions, where the prior month’s y/y figure was upwardly revised by two tenths to 2.7% from 2.5% (there was also a base effect from the January 2017 level being revised down by 0.1%). Contributing to the recent rise is the recent minimum wage increased in 18 states and upward revisions to annual benchmarks. The weather may also have impacted via a fall in hours worked. Average weekly hours were down in the month by 0.2 to 34.3, thereby possibly boosting average hourly earnings (it was also the case that those not working because of the bad January weather will likely mostly have been lower wage earners, biasing up the average of those in work).
So all up, it is a little premature to conclude that the upswing in earnings growth is quite as strong as the headline figure suggests. That said, resident FOMC dove Neel Kashkari opined after the figures that if wage growth continues, ‘’it could have an effect on the path of interest rates’’. Kashkari was a voter last year, remember, and dissented against all three rate rises. Dallas Fed president Bob Kaplan was also out Friday, saying he is comfortable with three rate rises this year but that he sees risk of the need to do more, though this was not news (he said similar in mid-January).
It was pretty much one-way traffic in equities, bonds and the dollar post payrolls, equities already slated to be under pressure from Alphabet’s earnings miss and Apple’s downgraded Q2 revenue guidance released post Thursday’s market close. The IT sector lost 3%, losses only surpassed by a 4% drop for energy shares.
WTI crude only lost 30 cents but Brent fell by $1.10 to $68.58. Gold fell $10 and exchange traded metals lost 1% or so on average, though Iron ore added $1 to $72.94 to be virtually flat on the week. The bigger story for commodities this week has been the resurgent coking coal price (apparently driven by tight domestic supply in China and concerns bad weather could be about to disrupt Australian shipments).
In stocks, together with Monday and Tuesday’s losses, the 2.12% drop in the S&P left the index down 3.85% on the week. The S&P bottomed at 666 in the wake of the GFC and the Dow lost 666 points to 2.54% Friday, for a 4.1% loss on the week and inevitably spawning various ‘’beast’’ or devil-related commentary (and song references!).
In FX no currency was spared pressure from a reversal in the US dollar, but with risk appetite hit (e.g. VIX to nearly 18 from 13.5 on Thursday) the AUD was the biggest causality, already under pressure since Wednesday’s slight downside CPI surprise. Incidentally, the drop back below 80 cents this week should make it easier for the RBA not to raise its anxiety level on the AUD when it meets on Tuesday (and Governor Lowe speaks on Thursday).
CAD and NZD just about kept pace with the AUD’s downhill ski while the EUR fared the least badly against the USD. AUD/EUR has lost about 3% in the last week to 0.6361.
In index terms, DXY gained 0.6% on Friday and BBDXY 0.9% thanks to its smaller EUR weight, but on the week is only 0.14% higher (BBDXY +0.49%).
In Treasuries, the payrolls data drove extension of the recent longer end sell off with another 5bps added to 10s for an 18bps rise on the week (to 2.842%). Of note though, 2s actually fell (down 2bps on the day). Whatever the reason, it is worth noting that the US curve flattening has given way to bear steepening. Since the earlier flattening went hand in hand with a weakening US dollar, will steepening herald its revival? That is a brave call with the DXY barely 1% off its lows, but might mean dollar weakness from here on become less indiscriminate than it was in December and January.
This morning on the Economic Front we have German, Euro-Zone and UK Services/Composite PMI at 8.55 am, 9.00 am and 9.30 am respectively. This is followed at 9.30 am by Euro-Zone Sentix Investor Confidence and at 10.00 am by Retail Sales. At 2.45 pm we have US Services/Composite PMI. Finally at 3.00 pm we have the ISM Non-Manufacturing Composite.
March S&P 500
After 14 months of bullish action we finally saw a sell-off greater than 2% with the S&P falling some 80 points on Friday. Last week was a week that we have not experienced in a while and the big question now is just a correction within an ongoing bull market or the start of something big. The recent confirmed Hindenburg Omen has certainly started to prove its worth after the previous HO’s were ignored by the market. Last Monday morning the S&P was trading at 2878 and with the overnight low of 2733 this is a huge move in a week. On the positive side the McClellan Oscillator closed with a -271 print and traditionally when this reading is between -250/-320 we tend to get at least a tradeable bottom, so I would not press the downside from here. As I posted on Friday the S&P was trading at my 2802 buy level before rallying on the NFP release to my 2809 T/P level. Subsequently I emailed my Platinum Members to re-buy the S&P again at 2794 before the market rallied to my 2802 T/P level. Finally very late in the session the S&P traded lower to my 2778 third buy level and as I did not want a position on board over the weekend I covered this position for a small loss at 2777 and I am now flat. The S&P has good support from 2728/2738 and today I will be a small buyer in this area with a 2722 stop. I am looking for one more sell-off as margin calls go out to traders long from last week before we turn around and rally as indicated by the McClellan Oscillator. If I am taken long and subsequently stopped out of this position I will be a more aggressive buyer from 2685/2705 with a 2678 stop. I do not want to be short the S&P at this time.
EUR/USD
The Euro traded lower to my 1.0480 T/P level on my 1.0510 short position ahead of the NFP on Friday and I am still flat. Today I will again look to sell the Euro on any rally higher to 1.0490/1.0530 with a 1.0575 stop. My only interest in buying the Euro is on a dip lower to 1.2290/1.2330 with a 1.2260 stop.
March Dollar Index
My latest long 88.60 Dollar position worked well with the market rallying back above 89.10. This rally higher enabled me to cover this position at my 88.80 T/P level ahead of the NFP data. Today I will again look to buy the Dollar on any dip lower to 88.20/88.60 with a 87.90 stop.
March DAX
My DAX plan worked well on Friday with the market trading the whole of my first buy range for an average buy level at 12805. Subsequently the DAX rallied strong and this move higher enabled me to cover this position at my revised 12848 T/P level. As everyone should know at this stage the DAX Futures hours are from 7.00 am to 9.00 pm Monday to Friday. Outside these hours the spread betting firms make their own prices which in my opinion are not valid. With the US Indices selling off on Friday the DAX closed higher than my second buy range before opening this morning at the bottom of this range at 12650. The DAX rallied strongly from here and this move higher enabled me to cover this position at my revised 12695 T/P level as emailed to my Platinum Members and I am now flat. Today I will again look to buy the DAX on any dip lower to 12500/12560 with a 12450 stop. Despite the DAX trading below 12700 I do not want to be short especially with the McClellan Oscillator so negative.
March FTSE
My FTSE plan did not work well with the market trading the whole of my 7370/7410 buy range for an average buy level at 7390. Late on Friday I was stopped out of this trade at 7340 and I am now flat. Overnight the FTSE traded to a low of 7272 before rallying. The next big support for the market is at 7250 and today I will be a buyer from 7215/7255 with a 7180 stop. Given how oversold the FTSE is trading I do not want to be short the market at this time.
Dow Rolling Contract
Friday’s Dow decline of 666 points was the largest daily decline since December 1, 2008 (680 points) during the Great Credit Crisis. Friday’s decline was accompanied by 8.7 more stocks that closed down than closed up on the NYSE, the strongest downside breadth since September 2016. Every one of the Dow’s 30 stocks ended the session on the downside and 469 out of the 500 stocks in the S&P ended the day lower. On Friday after the Dow traded lower to my 25890 buy level the market had a small rally but you had to be quick and I emailed my Platinum Members ton exit any long position at 25940 and I am still flat. Incredibly the Dow traded to an overnight low of 25183 which is some 1500 points lower than where we were this time last week. The Dow has trendline support at 25100 and today I will be a small buyer from 25030/25130 with a 24900 wider stop.
March NASDAQ
My NASDAQ plan did not work well with the market trading lower to my 6880 buy level before stopping me out of this trade at 6810 and I am still flat. The NASDAQ has strong support from 6590/6640 and today I will be a buyer in this area with a 6555 stop. Given how oversold the MO is, short positions are too risky at this time.
March BUND
The BUND which traded lower to my 157.80 buy level before rallying back above 158 and I used this rally to cover my long position at my revised 157.95 T/P level and I am now flat. The fact that the Bund closed below the 200 week Moving Average at 158.60 is bearish and today I will be a seller on any rally higher to 158.50/158.90 with a 159.10 tight stop. The Bund has support at 157.40 and today I will be a buyer from 157.00/157.45 with a 156.70 stop.
Gold Rolling Contract
I am still flat Gold and as I am long Silver I will now stay flat Gold and continue to observe from the sidelines. With so much going on in the other markets I am happy to have no Gold position at this time.
Silver Rolling Contract
Silver traded the whole of my buy range on Friday which has me long at an average rate of 16.83. This morning Silver is trying to rally and I will now lower my T/P level on this position to 16.95. I will leave my stop unchanged at 16.30 and if my T/P level is filled I will be back with a new update for my Platinum Members.
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