As expected the Fed lifted the Federal Funds rate target by 0.25bps taking the range to 0.5%-75% from 0.25%-0.5%. More importantly, however forecasts for the future Fed Funds rate path (the so called dot plot) now suggest 3 hikes in 2017 versus 2 previously and three hikes in 2018 and 2019, same as before. This is the first increase in the dot points since September 2014 and interestingly, as well, now there is a greater dispersion in the forecast, suggesting a wider range of views and a tinge of more hawkishness than before. For example, previously in 2017 2 hikes had 7 votes, now 3 hikes has 6 votes and 4 hikes has 3 votes. Similarly in September 2018 3 hikes had 7 votes and now 3 hikes has 5 votes and four hikes has 3 votes. So while the median for 2018 is unchanged, there is certainly a bias for more hikes than before.
To mark my 1225th issue of Tradernoble Daily Commentary I am offering a special 2 year rate of Euro 2750 for my Platinum Service which includes 1/4 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 made 11 points yesterday and is now ahead by 981 points for December having made 1971 points in November and 1582 points in October. The previous four months saw gains of 1142, 1782, 1682 and 2550 points respectively. Since I started this Platinum Service in June 2015 it has averaged a monthly gain of over 1900 points.
Reading through the Statement, the Committee’s expectations of further expansion in economic activity as well as additional strengthening in the labour market and further rise in inflation were cited as the reasons for raising the target range for the Federal Funds Rate. The new set of forecasts shows a very mild upward revision to GDP growth, for 2016 GDP growth is now seen at 1.9% versus 1.8% previously and 2017 is now seen at 2.1% versus 2.0%. The Unemployment rate in 2016 is now seen at 4.7% vs 4.8% previously and 4.5% in 2017 versus 4.6%. Meanwhile core PCE and headline PCE have been left unchanged, however the Statement recognizes the pick-up in inflation and it notes inflation compensation has moved up “considerably”. On this score it is interesting to note that Fed Chair Yellen said that some FOMC participants adjusted their forecast based on expectations of further fiscal stimulus.
Market reaction to the more hawkish Fed outlook has seen the US Dollar rise across board while US Treasury yields have also shifted higher with the move led by the front end of the curve. Meanwhile US equities have fallen sharply on the news with the Dow, S&P and NASDAQ all closing down between 0.30% a 0.60%.
Looking at currencies in more detail, NOK (-1.66%) and Yen (-1.18%) are at the bottom of the pile, essentially following the moves in oil and US Treasury yields respectively while the AUD and NZD are about 1% lower reflecting the increase in risk aversion. Meanwhile GBP is the best G10 performer, winning the least ugly contest.
Unsurprisingly prior to the Fed announcements markets were essentially marking time. US equities were traded in a narrow range, oil prices drifted lower throughout the night and USD was a little changed against most currencies, barring the CAD and the NOK which were seemingly affected by the retreat in oil prices.
As for data releases yesterday, US data came out on the disappointing side and played into the softer US Dollar tone pre FOMC. US Retail Sales printed below consensus across the board (0.1% vs 0.3%e, ex auto +0.2% vs 0.4%e and control group 0.1% vs 0.3%e) and Industrial Production fell by 0.4% in November below consensus of -0.3%.
UK Unemployment held steady at 4.8%, but the employment change (-6k vs 50ke) was a big miss while Average Earnings (ex bonus) were a bit stronger. Cable was unperturbed by the data and indeed it managed to climbed above 1.27 pre FOMC, buoyed by the broad USD weakness seen prior the announcement before getting hit hard to trade at 1.2550 as I write my commentary.
This morning on the economic front we have German and Euro-Zone Manufacturing Services PMI at 8.30 am and 9.00 am respectively. This is followed at 9.30 am by UK Retail Sales. At 12.00 pm we have the Bank of England Interest Rate announcement and BoE Asset Purchase. Next at 1.30 pm we have the US Weekly Jobless Claims , CPI, Current Account Balance, Empire Manufacturing and the Philly Fed Business Outlook. Finally we have US Manufacturing PMI and the NAHB Housing Market Index at 2.45 pm and 3.00 pm respectively.
March S&P 500
I have now rolled to the March Contract as the December Contract expires tomorrow. The March currently trades at a 5.5 Handle or point discount to the Cash S&P. Yesterday I was very unlucky with my S&P call as my 2247 buy level missed by less than a point while my 2280 sell level missed by 2 ½ points and I am still flat. While the Dow had a downside Key Day Reversal the S&P missed having one by one point yesterday as the market finally corrected some of its overbought condition. However with the Quarterly Expiration for the December Futures and Options Contracts tomorrow I am reluctant to go short. Today the March Contract has strong support from 2239/2245 and I will be a buyer in this area with a 2233 stop. If I am taken long and subsequently stopped out I will be a very aggressive buyer on any dip lower to 2218/2224 with a 2213 stop. Given the fact that we have the December Expiration tomorrow, I do not want to be short the S&P at this time.
EUR/USD
Initially my Euro plan worked well as the Euro rebounded after the market hit my 1.0575 buy level. I thought the Euro would rally further on Yellen especially after the weak US Economic data reported yesterday but this plan did not happen and I was stopped out of this trade at 1.0520. As the March 2015 low at 1.0462 is such a key pivot point I emailed my Platinum Members to buy the Euro again at 1.0480 before the market rallied overnight to hit my 1.0520 T/P level and I am now flat. Today I will again look to buy the Euro in smaller size from 1.0425/1.0465 with a tight 1.0395 stop. If the Euro does close below 1.0430 this evening then I will use rallies to set up a short position as it will be inevitable then that the Euro will at least test parity. However with the DSI reading still low I am reluctant to chase this market lower.
December Dollar Index
As I was already long the Euro I did not sell the Dollar as one Dollar position was enough going into the Yellen press conference. After she finished, the Dollar spiked through my sell range and stop and I am still flat. The break and close over 102.05 yesterday was bullish with the next major resistance not until 103.10/103.50 and today I will again be a seller in this area with a 103.80 stop. I will also look to buy the Dollar on any dip lower to 101.20/101.60 with a 100.75 stop.
March DAX
I have now rolled to the March Contract which currently trades at a small seven point discount to the Cash DAX. Unfortunately the DAX missed my buy level before rallying strongly this morning on the back of the weaker Euro. As I have been saying over the past few weeks it is pointless in trying to sell the DAX especially following the eventual break of the key 10800/10850 resistance level and this area will act as very strong support on any subsequent aggressive sell-off over the coming weeks. Today I will move my buy level higher to 11180/11240 with a 11130 stop. I still do not want to be short the DAX at this time.
March FTSE
I have now rolled to the March Contract which trades with a hefty 63 points discount to the Cash FTSE. Unfortunately my 6910 December buy level just missed following yesterday’s US Rate hike before the market rallied and I am still flat. Today I will look to buy the March Contract on any dip lower to 6810/6850 with a 6775 stop. Given the severity of the discount in the March Contract I do not want to be short the FTSE at this time.
Dow Rolling Contract
Finally the 20 year high in the RSI kicked in for the Dow which had a large downside Key Day Reversal off its 19966 high print following the FOMC announcement. However the odds are still better than even that the Dow will break the key round number at 20,000 at some stage over the coming days. Internally the market got hit hard yesterday with the McClellan Oscillator closing with a negative 16 print down from Tuesday’s positive reading at 94. I would not be surprised if the stock market generated another Hindenburg Omen yesterday as the key component for this event is to have a negative MO reading. Today I will keep my macro short level from 20200/20350 with the same 20450 stop. I will also be a small seller on any rally higher to 19990/20050 with a 20110 stop. Given the significance of yesterday’s Key Day Reversal I do not want to be long the Dow at this time.
March BUND
The Bund initially spiked higher on the FOMC announcement before selling off later. With the DSI reading for the US Bond market still in single digits I believe that the downside for the Bund to be limited. This morning the Bund has hit my average buy level so far at 161.30 and I will now raise my stop on this position to a tight 160.95.
Gold Rolling Contract
My Gold plan worked well yesterday as Gold hit my 1154 buy level before rebounding to a 1162.50 high and this rally enabled me to cover my long position at 1162 and I am now flat. Subsequently after Yellen finished her press conference, Gold got hit hard and in the process has made its seventh new low since last month while at the same time Silver has so far held its equivalent low at 16.15, creating a huge divergence between the two commodities. I still believe that given the triplet of 6% DSI readings for Gold that the downside is limited and today I will again look to buy Gold on any further dip lower to 1123/1132 with a 1115 stop.
Silver Rolling Contract
Silver had a nice rally to 17.25 ahead of the FOMC before subsequently selling off. This sell-off continued overnight and in the process I was stopped out of my long position at 16.60. With Silver continuing to hold above its key 16.15 pivot point I bought the market again at 16.66 with a 16.05 stop.
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