The USD and Sterling are the both softer over the past 24 hours, after US core CPI surprised by 1/10% to the downside and the Bank of England shaved a 1/10% off its inflation forecasts and gave a nod the current market pricing that currently see no more than three 25-point Bank Rate rises over the next 2-3 years. The NZD is still weaker than both currencies following yesterday morning’s crunch lower after new Governor Orr said he sees an equal chance of the next move in rates being down as up. The NZD has recovered about two thirds of its losses against the USD but none versus other currencies, including the AUD. US stocks and bonds both liked the softer CPI news, the S&P finishing up almost 1% with the VIX at its lowest close since Jan 26th, 10-year Treasuries down 2.5bps to 2.965% and the 30-year 5bps following a strong auction.
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The surprise from the Bank of England was not that they left rates unchanged, nor the 7-2 vote (both were fully expected) but rather that the inflation profile was lowered by about 0.1% to be at target in 2-years (lower pass-through from past exchange rate weakness being cited) and that these lower forecasts came on the assumption that Bank Rate moves up only in line with prevailing market pricing over the forecast horizon. GBP/USD promptly fell from above $1.36 to below $1.35 (low of $1.3460). Losses were then pared in the wake of the US CPI report but Sterling is still the second weakest currency of the past 24 hours after the NZD.
US CPI met expectations at 0.2% in headline terms, but rose by only 0.1% (0.098% unrounded) against 0.2% expected to leave the year-on-year rate unchanged at 2.1% against 2.2% expected. Lower used car and airline fares were largely responsible for the downside miss, the former seeing an ongoing reversal from last year’s post-hurricane surge. The key takeaway from the report is that there is as yet no smoking gun for the Fed to be lifting its median ‘’dot’’ forecast for the expected number of Fed rate hikes this year from two more to three. The read-through from CPI to the April core PCE data due at month end is that it should fall from 1.9% to 1.8%, albeit still on track to push above 2% in coming months.
The US dollar, having already recoiled by about 0.5% on Wednesday for no obvious fundamental reason, is down about another 0.25% compared to its pre-CPI levels. This fully accounts for the recapture of the 0.75 handle by AUD/USD (overnight high of 0.7540) though I can also point to the latest decline in the VIX and small extension of this week’s commodity price gains. AUD is the best performing currency of the past 24 hours but AUD/USD still remains substantially below my short term fair value model estimate (currently close to 0.79). This suggests scope for a deeper correction higher in coming days if the USD dollar further loses its footing from its mid-week highs.
Finally, the return of political uncertainty in the Euro-Zone hasn’t done any real harm to the Euro, even before the US CPI inspired USD sell-off, but has seen Italian government bonds underperform their ‘’core’’ counterparts. This is after former Italian PM Silvio Berlusconi announced he was dropping his opposition to a coalition between the far-left Five-Star movement and far-right League, after months of failed negotiations to form a government. As one analyst that I follow notes, the two potential coalition partners have plenty of ideological differences on economic policy (the League want a flat income tax while Five Star want a guaranteed income scheme for the poor) but are seemingly united by their mistrust of Brussels and dislike of austerity. The Five Star movement has in the past called for a referendum on the Euro, and while they have backed away from that stance recently (calling it a ‘’last resort’’) investors are likely to be unsettled.
The spread between Italian government bonds and those of German bunds widened 5bps yesterday, although it remains well off the widest levels reached when the market was worried about the French election last year. Certainty I do not see these developments as representing anything like the existential threat to the Euro that the election of Marine Le Pen would have represented. Markets seem to concur so far, with the likes of the EUR/CHF exchange rate actually moving up not down in the last 24 hours.
This morning on the Economic Front we have no data of note due from either the UK or the Euro-Zone. At 1.30 pm we have US Import price index and Canadian Unemployment. Finally at 3.00 pm we have the University of Michigan Consumer Sentiment.
June S&P 500
The break of the 50 Day Moving Average on Wednesday saw the S&P extend its gains to over 130 Handles since the 2591 low made last Thursday with the VIX closing at 13.23 which is the lowest close since January 26. Meanwhile the McClellan Oscillator continued to improve closing last night at +127. My S&P plan worked well with the market trading higher to my 2723 sell level with a 2725 high print before falling 10 Handles. As I had a sell level in the Dow just above the market I covered my S&P position at 2721 as I thought that the Dow would hit my sell price but unfortunately it did not. For anyone who did sell the S&P the market dropped in one red candle just as I emailed my Platinum Members which hopefully gave everyone a nice gain. Even though the US stock market is overvalued there is nothing on the horizon to knock the market down and for now this market continues to be a buy on dips. Today I will again look to buy the S&P on any dip lower to 2698/2708 with a 2691 stop. For now I do not want to be short the S&P at this time.
Frustratingly the Euro just missed my 1.1850 buy level after I posted with a 1.1853 low print before rallying 80 points and I am still flat. For those members who do buy in front of my levels then this strategy worked very well. One of the best technical indicators that I follow is the Daily Sentiment Index and when I wrote yesterday that the DSI had fallen to just 7% bulls I should have just bought the Euro instead of trying to be too clever with my buy level. Today I will now raise my buy level to 1.1840/1.1875 with a 1.1795 stop. Remember a break and close over 1.1990 this evening in New York is a buy signal for next week.
June Dollar Index
I am still flat the Dollar and today I will now lower my sell level to 92.95/93.35 with a 93.70 stop. Given how overbought the Dollar is trading I do not want to be long the Dollar at this time.
The DAX struggled to move higher yesterday which is no surprise given its overbought condition and the fact that the Euro started to finally rally. Today I will leave my sell level unchanged from 13110/13180 with a 13210 same stop. Meanwhile I will not chase this market higher and will only raise my buy level slightly to 12800/12880 with a 12735 stop.
My FTSE plan worked well with the market trading lower to my 7610 buy level before rallying on the Bank of England announcement to my 7635 T/P level and I am now flat. The FTSE is severely overbought as we approach the all-time high at 7740. Today I will be a small seller on any further rally to 7730/7770 with a 7805 stop. I will also be a buyer on any dip lower to 7595/7635 with a 7560 stop.
Dow Rolling Contract
As mentioned in my S&P commentary above the Dow just missed my sell level by a few points before selling off 100 points and I am still flat. There is no doubt that love him or hate him President Trump is getting a lot of his pre-election promises done and this is helping the feel-good factor in America. His approval rating is now at 65% as high as Regan’s was, which is some turnaround . The Dow has now rallied over 1250 points since the lows of last Thursday with the Fear & Greed Index now back in neutral territory with a 54 closing print last night. Today I will now raise my buy level in the Dow to 24400/24550 with a 24320 stop. Ahead of the weekend my only interest in selling the Dow is on a further rally higher to 24900/25050 with a 25130 tight stop.
The NASDAQ 100 is leading the stock market higher with the S&P 600 Small Cap Index breaking out to a new record high. Given this background it is very difficult to be short. The NASDAQ has had a huge rally over the past two weeks as one short position after another gets stopped out. The NASDAQ which only just missed my buy level on Wednesday has now risen over 150 points since then. The market is getting overbought and does have resistance from 7035/7075 and today I will be a seller in this area with a 7110 tight stop. Meanwhile I will now raise my buy level to 6840/6880 with a 6795 stop.
There is nothing going on in the Bund as the market trades in a narrow range around the key 159.00 pivot point. I am still flat and today I will now lower my sell level to 159.55/159.95 with a 160.30 stop.
Gold Rolling Contract
Gold continues to build value above the key 200 Day Moving Average at 1303. I am still flat and today I will now raise my buy level to 1299/1306 with a 1292 stop.
Silver Rolling Contract
Silver continues to trade in a narrow range. It needs to break and close over 17 for the market to turn bullish. I am still flat and today I will now raise my buy level to 16.25/16.55 with a 15.85 higher stop.