I warned yesterday about the possibility of a US rate hike at next month’s FOMC Meeting and that argument gained further currency with the US CPI and core-Retail Sales printing double the market consensus. That has seen the OIS market lift pricing for a March rate hike to 48% from 37% a couple of days ago. Movements in other markets were more muted then what your scribe would have expected – perhaps suggestive that recent political events (Russian links to Trump’s election team and the resignation of Mike Flynn as National Security Adviser) may be weighing. Nevertheless, it seems a March rate hike is a distinct possibility.
To mark my 1275th 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 115 points yesterday and is now ahead by 940 points for February having made 1734 points in January, 1351 in December, 1971 in November and 1582 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 1800 points.
First to the data. Economic data was very strong with Headline CPI for January printing double the market consensus at 0.6% m/m which takes the annual rate to 2.5% y/y. Some of that stellar increase reflects petrol prices, but even when excluding that, the core measure also rose strongly up 0.3% m/m to be 2.3% higher y/y. While the Fed targets the PCE measure, a general rule of thumb is that the CPI gives a good indication of the PCE which usually translates to the CPI less 0.5% points. That means with annual core inflation at 2.3%, core PCE is likely to be at 1.8% y/y and very close to the Fed’s 2% target, while the headline measure is likely to be already there.
US Retail Sales were also strong, with Sales Ex-Autos up 0.8%, double the consensus of 0.4%. However, that does come on the back of a weak December, so averaging the two months is suggestive of solid consumer spending rather than an acceleration. The manufacturing sector also continued its strength with the Empire State rising to 18.7 from 6.5 and well above consensus of 7.0. The rise in the Empire is also suggestive of another strong ISM Manufacturing number for February.
US Treasury yields were higher on the back of the strong data, with yields up 3.4 bps to 2.50%. The inflation component almost entirely drove the increase with breakeven inflation rates up 3.5 bps. Other major Sovereign Bond Yields were also higher with German Bund yields up 0.70bps to 0.37% while UK Gilts yields fell 1.3bps to 1.30% on the back of a mixed labour market report (while employment was strong, wage growth was below expectations).
The US Dollar did rise on the news, being up almost 0.5% before reversing to end the day broadly unchanged. There does not appear to be a clear catalyst for the reversal. The Kiwi, Norwegian Krone and the Aussie all outperformed overnight, up 0.6%, 0.6%, and 0.5% respectively. The Aussie broke up through the $US0.77 barrier this morning hitting an earlier high at 0.7730 and is currently sitting at $US0.7703. The Aussie labour market data could provide the catalyst for a firmer footing at 77.
Yellen’s testimony before Congress mostly reiterated the points made yesterday to the Senate. The Fed Chair did note the improvement in Business and Consumer Confidence was real and her comments on the US economy generally provided support to the equity market. Equities were higher across the board with the S&P500 up 0.4% and at a new record high. European equities were also stronger with the EuroStoxx and FTSE up 0.5% each.
There were also a number of Fed speakers yesterday afternoon, but these had little market impact. Of interest was the Fed’s Rosengren (non-voter and recent hawk) who indicated that more than three rate hikes was possible for 2017, stating “likely be appropriate to raise short-term interest rates at least as quickly as suggested by the Fed’s current…median forecast, and possibly even a bit more rapidly”.
Political events also developed overnight with further commentary in the press on Trump’s pre-election teams links with Russia. Nevertheless it appears to your scribe that Trump is starting to tone down is rhetoric with Japan’s PM Abe inferring that Trump backed away on his comments of the Japanese manipulating their currency stating “Trump shared the view that our monetary policy is not for currency manipulation but for ending deflation. Finally, while the US is clearly set to raise rates this year, Sweden’s Riskbank is unlikely to follow with the Bank sticking to its dovish tone.
Today on the economic front at 12.30 pm the ECB Minutes of last month’s ECB Meeting will be released. This is followed at 1.30 pm by US Housing Starts, Building Permits, Weekly Jobless Claims and the Philly Fed Business Outlook. Finally at 9.00 pm we have the Net Long Term/Total Net Tic Flows.
Meanwhile both the ECB’s Moscovici and Nowotny are speaking on an Economic Panel in Vienna which gets underway at 1.30 pm.
March S&P 500
The S&P has now rallied over 80 Handles (full points) so far this month in what is one of the most over extended markets that I have witnessed in many years. The PE ratio is trading at an unsustainable 26.30 while the CNN Fear&Greed Index is over 80 which is of real concern to me. The continued expansion of the PE multiple and the continued premium of share prices generally to book value is another real concern. However as I noted in one of my emails to my Platinum Members the quote from Keynes that ”Markets can remain illogical longer than I remain solvent” comes to mind. The Daily Sentiment Index is at its highest level in three years while as noted last week the Weekly Investors Intelligence Advisors Survey is at 70% bulls which is the highest since just before the 1987 crash. Remember as mentioned yesterday the PE ratio for the S&P topped at just above 20 on October 1, 2007 ahead of the Global Financial Crisis. To add to this extreme sentiment it is nearly 50 trading sessions and a new record since the S&P has fallen by 1%. However until we get a sell extreme that lasts for more than a few days it is very difficult to be short for more than a few hours. The S&P is also trading outside its Daily Bollinger Band and at the top of the Williams Index, yet internally as shown by the McClellan Oscillator is weak with the MO closing lower last night at +72, which is incredible when we are trading at new all-time highs. Yesterday after the S&P hit my 2345 sell level, I emailed my Platinum Members to add to this position at 2351 which was filled on the re-open of the Futures Market last night and I am now short at an average rate of 2348 with the same 2354 tight stop. If I am stopped out of this position I will be a more aggressive seller from 2359/2365 with a 2370 stop. The S&P has support at 2340 and strong support at 2332 and today my only interest in buying the market is on a dip lower to 2327/2333 with a 2322 stop.
EUR/USD
My Euro plan worked well with the market trading lower to my 1.0530 buy level before rallying back above 1.06. However in keeping with my strategy of going flat into a major event such as Fed Chair Yellen’s Testimony yesterday I covered my long position at 1.0542 and I am now flat. Today I will again look to buy the Euro on any dip lower to 1.0540/1.0575 with a 1.0515 stop which is just below yesterday’s 1.0519 low print. I still do not want to be short the Euro at this time.
March Dollar Index
Unfortunately the Dollar just missed my 101.80 sell level with a 101.77 high print and I am still flat. It is even more frustrating when you see the Dollar trading 100 points lower this morning. Today my only interest in buying the Dollar is on a further dip lower to 99.90/100.30 with a 99.55 stop. I will also lower my sell level in the Dollar to 101.40/101.80 with a 102.10 stop. Remember following last month’s Downside Key Month Reversal that all rallies in the Dollar should be sold as the bear trend resumes.
March DAX
My DAX plan also worked well with the market hitting my 11730 buy level. Unfortunately just like the Euro above I covered this position way too early at 11740 ahead of Yellen. The only good thing about this was as soon as I emailed my Platinum Members the DAX spiked higher. However I make no apologies of going flat into any major announcement as this policy as served us very well in the past and will continue to do so in the future. This morning the DAX is again trying to break back above the key 11800 resistance level. Yesterday we traded as high as 11845 before the market got hit for 120 points thus showing how important the 11800/11850 area is. Today I will again look to buy the DAX on any dip lower to 11685/11735 with a tight 11645 stop. I still do not want to be short the DAX at this time.
March FTSE
Finally just before the close last night the FTSE hit my 7265 sell level before trading 30 points lower this morning and this sell-off enabled me to cover this position at my revised 7243 T/P level and I am now flat. The FTSE has strong resistance at the January all-time high at 7292 and today I will again look to sell the market on any further rally to 7280/7310 with a 7335 tight stop. Obviously a break and close over 7300 this evening will add to the bullishness of the market but be careful as we are very overbought.
Dow Rolling Contract
Thankfully after I posted yesterday morning the Dow was trading at the 20545 level which I had earlier gone short myself before falling to a low at 20480 and this sell-off enabled me to cover this position at my revised 20515 T/P level and I am now flat. This morning the Dow broke its seven month trendline as if it never existed after a near 800 point rally so far this month. Of course short positions are very risky in this bull trend but with sentiment so extreme as mentioned at length in my S&P commentary, this is probably as good a place as any to try and put on a short position. It is possible that the Dow could trade as high as 21,000 in this bull move but today given how far we are trading over the Daily Bollinger Band I will again look to sell the market from 20690/20750 with a 20810 stop. My only interest in buying the Dow is on a large dip lower to 20420/20475 with a 20370 stop.
March BUND
No change as I am still a buyer on any dip lower to 162.60/163.00 with a 162.30 stop. Despite the negative price action I still do not want to be short the Bund at this time.
Gold Rolling Contract
My Gold plan worked well with the market hitting my 1217 buy level before trading to an overnight high at 1237. However as so many of my positions hit ahead of Yellen I again covered this trade as it turns out way too early at 1220.75 and I am now flat. There is no doubt that Gold has very strong support at the 1215/1220 area and today I will again look to buy the market on any dip lower to 1216/1223 with a 1210 stop.
Silver Rolling Contract
My Silver plan also worked well with the market again trading lower to my 17.80 buy level before rallying back above 18 and this rally enabled me to cover this position at my revised 17.94 T/P level. This morning Silver is again testing 18 and I have a feeling that this market is going to trade a lot higher. For this reason I have again bought Silver here at 17.95 with a tight 17.50 stop.
I am lecturing again in the Dublin offices of IG Index this evening at 6.00 pm and if anyone would like to attend they can register on the following link:
https://www.ig.com/uk/trumps-presidency
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