If US April core CPI had printed just .007% lower than the 0.256% it actually did, it would have been rounded down to 0.2% on the month not up to 0.3%, and arguably most of Friday’s market price action wouldn’t have occurred. As it was, almost all the price action in FX and Interest Rates came in the immediate aftermath of the CPI release, which kept the annual core rate at 1.8% against expectations for a fall back to 1.7%. Despite the exaggeration caused by the rounding effect, a lot is being made of the fact that core CPI has run at a 2.6% annualised rate in the last three months.
The biggest driver of CPI was ‘owners’ equivalent rent’ and which makes up 31% of core CPI. This rose by 0.3%. There was also a big jump in medical services ((+0.9%) led by a 1.7% jump in hospital costs. Health insurance costs also rose quite strongly. The overall sense here is that the ongoing impact of lower Oil prices on inflation in general, and of Dollar strength on tradeable goods prices in particular, is no longer sufficient to prevent core inflation rising and led by services.
A few hours after CPI, Fed chair Yellen says she still expected to take a first step toward policy normalisation later this year. Her remarks appeared to underpin rather than exacerbate the earlier back-up in US yields and the significantly stronger Dollar.
In FX, DXY added 1% to 96.50, its best level since 29 April, with EUR/USD 1.2% to 1.0970. News that German chancellor Merkel and other EU officials had told Greek PM Tsipras in Riga this week that there could be no bailout deal without IMF approval, came too late in the day to be a EUR-negative factor. On Sunday night, we’ve had the Greek interior minister Nikos Voutsis telling Greek TV station Mega that Greece will be unable to meet pension and wage bills in June and also reimburse money owed to the IMF without a bailout deal with creditors.
The irony of the fact that in the days after the passing of the Nobel economist, John Nash, who is known for his work on game theory and sub-optimal equilibrium (I’m going to do this because I think you are going to do that), that Greece and its creditors are digging in on their standoff, is not lost on economists. People ask how there could be an ‘accident’ where Greece defaults, and this is how: both sides believe the other side will back down. And while they are both looking at each other, with an eye to their respective stakeholders; the money flows from Greek banks and the money to pay Greece’s internal obligations (salaries, pensions, etc) and external obligations (IMF, ECB) runs out. We’ve been here before (twice) and so markets are relatively complacent but yesterday there were twinges of concern: Spain’s equity market fell 2% after the ruling austerity party lost many votes in the Municipal Elections. While, Portugal’s bond yields rose sharply – they are a likely candidate to be taking lots of interest in the Greek negotiations given their own austerity obligations.
This morning on the economic front, we have no data of note due from the Euro-Zone while at 11.00 am we have UK Reported Sales. However this afternoon is very busy for US Economic data. First up we have Durable Goods Orders at 1.30pm. At 2.00 pm we have FHFA House Price Index and House Price Purchase Index. This is followed at 3.00 pm by Services PMI, New Home Sales, Consumer Confidence Index and the Richmond Fed Manufacturing Index. Finally at 3.30 pm the Dallas Fed Manufacturing Index is released. Later at 5.30 Fed Vice Chair Fischer will speak on the Global Economy in Israel at 5.30 pm.
June S&P 500
The S&P plan worked well on Friday as shortly after the US CPI was released the market traded lower which enabled me to cover my short 2131 position from last Thursday at my take profit level of 2124 as outlined in my Platinum Service. Yesterday the Futures Market trade lower in the few hours that the market was opened which saw the S&P trade lower to my 2120 buy level. I am still long and today I will raise my stop on this position to 2116. If I am stopped out of this position I will be a more aggressive buyer in front of 2112 with a 2105 stop. I will again be a small seller on any further rally to 2133/2138 with a tight 2142 stop.
EUR/USD
My Euro plan did not work out so well on Friday in what was a wild trading session for the Euro which had briefly broken above 1.12 before getting slammed on US CPI and Yellen. The fall in the Euro saw me buy the market at 1.1060 before very quickly stopping me out this small position for a small loss at 1.1025 (again emphasising how important it is to have stops in the market) and I am now flat. While I was very surprised by the price action and weakness in the Euro on Friday I still do not believe that we will break the now major support at 1.0800/1.0840. Today I will again be a small buyer on any further dip to 1.0870/1.0920 with a wider 1.0835 stop. If I am taken long and subsequently stopped out of any long position, I will be a more aggressive buyer in front of 1.0850 with a 1.0780 stop. Despite the negative price action I still do not want to be short the Euro at this time.
June US Dollar Index
My Dollar plan did not work out well on Friday. Thankfully I had a tight stop because as soon as I went short at 96.10 I was very quickly stopped out of this position for a small loss at 96.40 and I am now flat. Today I will try and go short one more time on any spike higher to 96.90/97.20 with a 97.50 stop. I still do not want to be long the Dollar at this time despite the positive price action.
June DAX
No change as my only interest in going short the DAX is still on a rally higher to 11930/11980 with same wider 12050 stop. I am sticking to my view that I do not believe the Euro will stay lower for much longer which is another reason why I do not want to be long the DAX at this time.
June FTSE
My FTSE plan worked well on Friday as shortly after I posted the FTSE was trading at my 7050 sell level before having a nice sell-off which enabled me to cover at my take profit level of 7005 as indicated in my Platinum Service and I am now flat. Today I will again be a small seller on any rally higher to 7045/7075 with a 7095 stop. I will also move my buy level higher to 6940/6975 with a 6915 stop on any long position.
Dow Rolling Contract
No change as my only interest in selling the Dow is still on a rally higher to 18370/18420 with the same 18460 stop. The main reason that I do not to lower my sell level is the fact that today is Tuesday and so far in 2015 the market has nearly risen on every Tuesday.
June BUND
No change as I am still a small seller on any rally higher to 154.30/154.60 with the same 154.80 stop. I will also leave my buy level unchanged at 153.25/153.55 which the Bund came within two points of entering my buy level after the open on Friday before rallying strongly. If I am taken long I will leave my stop the same at 152.85.
Gold Rolling Contract
I am impressed how well Gold and Silver held in on Friday despite the much stronger US Dollar. I am still long at 1212 with the same 1199 stop. Again if I am stopped out of this position I will be a more aggressive buyer in front of 1190 with the same 1179 stop.
Silver Rolling Contract
No change as I am still long at 17.10 with the same 16.80 stop. Again if I am stopped out of this long position I will be a more aggressive buyer in front of 16.50 with the same 15.90 stop.
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