The Fed last night announced its fourth Rate hike in the Fed Funds rate by ¼%, as entirely expected, lifting the Federal funds rate to 1.00-1.25%. But we walk in this morning with the US dollar having been pressured and the US Treasury curve lower. Another case of the usual “buy the rumour, sell the fact”? The explanation comes only in part from a dovish Fed hike/as expected result, also with the Fed’s own rate projections in their “dot plot” rate forecasts hardly moved. The 2017 Fed median forecast still embodies one more rate hike this year, three more next year (again, as before), with the Fed Funds by the end of 2019 getting to 2.9%, still effectively at the 3% still-expected.
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For anyone following my Platinum Service it made 66 points yesterday and is now ahead by 438 points for June having made 1071 points in May, 1376 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 1750 points.
Selling of the USD (and lower Treasury yields) came after yet another downside surprise from the CPI that did the trick. Headline US CPI for May eased 0.1% (flat expected) with core inflation also under-clubbing expectations at just +0.1%, bringing annual core CPI down to 1.7% y/y from 1.9% that was also the expectation. As if the top line undershoot was not telling enough, the detail of the low CPI looked to have more breadth in this report with more than just low cell phone charges at play (a reason why Yellen was at pains to point out the idiosyncratic factors at work in recent CPIs) but an array of soft price categories. Apparel, owner occupied rent, autos, medical care, airfares, recreation and education were mentioned. Pause for thought again.
Also released yesterday was the US Retail Sales that was also lower than expected in May (partly low prices), but the sour taste from that neutralised by upward revisions to March and April. That report, plus the low CPI saw the Atlanta Fed tweak up its Q2 GDPNow estimate to 3.2% from 3.0%. (Higher nominal spending on net over recent months and lower CPI both help support real consumer spending and hence GDP.)
The Fed also outlined a plan under which it would begin to wind down the size of its balance sheet later this year, subject to the economy. There would be a monthly cap on selling of US Treasuries and agency securities, a cap that would be progressively increased to an envisioned maximum. The cap would start at $6bn/month for Treasuries and thereafter rise by $6bn/month until $30bn/m is reached. The initial cap would by $4bn/m for agency/mortgage-backed securities, then by $4bn/m until $20bn/m is reached and continued.
Janet Yellen and the FOMC were unspecific on the timing of when this rundown would commence. When asked in the press conference, she initially stuck to her lines saying that it would be once normalization of fed funds is well under way but acknowledged it could be “relatively soon”. So that time seems to approaching, perhaps at the September 21 meeting when the next set of Fed forecasts will be unveiled.
Market reaction saw the USD take a bath after the CPI but rallied after the Fed, though it looks to be again eking lower. It was a not dissimilar intra-day saw tooth pattern for Treasuries, though yields remain measurably lower for the day, the USD less so. AUD this morning trades just below 0.76, having tested above the figure on earlier USD weakness. It will all play out with the numbers. Oil had a bad day, WTI now with a 44 handle, also playing to the low inflation story, the CAD also an under-performer for the session.
This morning on the Economic Front we have UK Retail Sales at 9.30 am and this is followed at 10.00 am by Euro-Zone Trade Balance. At 12.00 pm we have the Bank of England Rate Announcement where no change is expected. This is followed at 1.30 pm by the US Weekly Jobless Claims, Empire Manufacturing and the Philly Fed Business Outlook. Next we have Industrial Production at 2.15 pm. Finally we have US Existing Home Sales and the Total Net/Long Term TIC Flows at 3.00 pm and 9.00 pm respectively.
September S&P 500
I have now rolled to the September Contract which trades at just a 2.2 handle (point) discount to the June Contract/Cash S&P. Yesterday my June S&P plan worked well with the market trading lower to my 2431 buy level before rallying to a rebound 2438 high print and this rally enabled me to cover this position at my revised 2434 T/P level and I am now flat. With the Quarterly Expiration tomorrow, downside is probably limited today despite the announcement that Trump is under investigation ”for possible obstruction of justice’’. Following Fed Chair Yellen’s press conference the NASDAQ got hit hard and my own view that as long as we stay below last Friday’s all-time high at 5898 then it is only a matter of time before the NASDAQ breaks to the downside. Today for the September Contract I will look to buy the market on any dip lower to 2414/2420 with a 2409 stop. However with the Quarterly Expiration tomorrow my only interest in selling the S&P is still on a rally higher to 2456/2462 with a 2467 stop.
Unfortunately the Euro just missed my 1.1310 with a 1.1297 high print before accelerating lower on the large interest rate differential between the US and Euro-Zone. With sentiment reading at near extreme levels plus the fact that the number of bullish bets towards the Euro is at 10 year highs it is difficult to see the Euro rally much further from here even though the market has been stuck with a 1.12 handle for the best part of the last four weeks. Today I will now lower my sell level slightly to 1.1260/1.1300 with a 1.1335 stop. For now I will leave my buy level unchanged at 1.1100/1.1140 with a 1.1075 higher stop.
September Dollar Index
The release of the much weaker than expected Retail Sales and lower CPI saw the Dollar getting hit hard with the market dropping to my 96.40 second buy level before stopping me out of my now average long 96.55 position at 96.10 a few minutes later. Following the release of the FOMC Statement I emailed my Platinum Members to re-buy the Dollar at 96.25 with a 96.65 T/P level which was thankfully filled before the close and I am now flat. Today given the continuing low DSI reading towards the US Dollar I will again look to buy the Index on any dip lower to 96.10/96.50 with a 95.75 stop.
I have now rolled to the September Contract which trades at an 8 point discount to the June Contract/Cash DAX. In the last few minutes the June Contract traded lower to my 12730 buy level. As we are rolling to the September Contract I emailed my Platinum Members to cover this position at my revised 12750 T/P level and I am now flat. With the US market under pressure as I write this commentary I will now lower my September DAX buy level slightly to 12610/12670 with a 12570 tight stop. With the June Contract Expiration tomorrow I still do not want to be short the DAX at this time.
I have now rolled to the September Contract which trades at a hefty 63 point discount to the June Contract/Cash FTSE. Yesterday my June plan worked well with the market initially trading lower to my 7470 buy level before bouncing back to a 7495 rebound high. As my buy level was triggered ahead of the FOMC Statement I emailed my Platinum Members to exit this position at 7479 and I am still flat. With the Sept Contract trading at such a discount to the Cash FTSE it is difficult to be short the market. For these reasons I will now look to buy the FTSE on any dip lower to 7315/7345 with a 7285 stop.
Dow Rolling Contract
Yesterday was another trading session of small margins with the Dow just missing my 21400 sell level with a 21392 high print before selling off 100 points and I am still flat. While both the S&P and NASDAQ closed lower yesterday the Dow managed to close 48 points higher. However the McClellan Oscillator weakened and is now barely in positive territory closing last night with a +38 print. Today I will lower my sell level slightly to 21390/21460 with the same 21530 stop. Despite the bullish price action in the Dow I still do not want to be long the market at this time.
The Bund traded higher to my 165.45 sell level ahead of the Fed Statement. Subsequently the Bund traded slightly lower and as I wanted to be flat ahead of the Yellen press conference I emailed my Platinum Members to exit this position at 165.37 and I am now flat. Today I will again look to sell the Bund on any further rally to 165.70/166.00 with a 166.30 stop.
Gold Rolling Contract
Frustratingly Gold missed my 1256 buy level with a 1256.80 low print before having a nice rally and I am still flat on what turned out to be quiet a volatile trading session for the precious metals. As I write this commentary Gold is again testing the 500 Week Moving Average at 1259. As I am back long Silver again I will now lower my Gold buy level slightly to 1243/1250 with a 1237 stop.
Silver Rolling Contract
Thankfully Silver rebounded yesterday to a high of 17.37 before subsequently getting hit hard following the Yellen press conference. This move higher hit my too early 17.10 T/P level. Subsequently I emailed my Platinum Members to re-buy Silver again and I am now long at an average rate of 16.92 with a wider 16.35 stop. Silver has strong support from 16.40/16.70 and I will only add into this position on any further move lower to 16.45 with the same stop. I will now lower my T/P level on this position to 17.15.