It would be easy to dismiss Friday’s US Payrolls Report as a backwards looking indicator. Certainly last Thursday’s Manufacturing ISM report -in particular the slump in the new orders sub-index- is a worry, revealing a clear linkage with the sharp slowdown in Chinese imports revealed in November’s trade data and subsequent manufacturing PMIs. There is also the no small matter of over 800,000 US public servants currently furloughed by the failure of the administration and the newly sworn in Congress to strike a deal that would get a large swathe of the government back to work. Yet there can be no denying that the US economy ended 2018 with strong positive momentum, a fact acknowledged by Jay Powell in his conversation alongside Janet Yellen and Ben Bernanke on Friday. US payrolls rose by a 312k in December (plus there were 58k worth of upward revision to October and November). Average earnings rose by 0.4%, also higher than expected and pushing annual growth up to a new cycle high of 3.2%.from 3.1% previously. Sure, the Unemployment Rate rose, from 3.7% to 3.9%, but only because of a surge in the labour forced (+419k) which served to pull the participation rate up by 0.2%.
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Prior to the employment report and soon and shortly after I posted last Friday, China announced a 1% cut to the Reserve Requirement Ratio, applicable to all banks and to be enacted in two stages but very close together (Jan 15th and 25th). Last year’s RRR cuts were only in 50bp increments (four in total). This year we might reasonably expect to see as many as four 100bp cuts and in the absence of capital outflow pressures on the currency, quite possibly cuts to the benchmark 1-year lending rate as well (currently 4.35%).
Of course, if the US and China shortly strike a comprehensive trade deal – in which respect the Q4 slump in the US stock market appears to be crystallising the US President’s mind, this might not be necessary. Either way, China is showing its intent to shore up growth.
Post the US payrolls report, Fed Chair Powell confirmed a more cautious 2019 Fed outlook and stated he is ‘’listening carefully’’ to markets. Echoing Dallas Fed President Kaplan on Thursday, Powell stated ‘’muted inflation’’ gives the Fed room to be ‘’patient and see how the economy goes’’.
How long could such a pause last for? Chair Powell drew a parallel to the 2016 Fed pause where the Fed went on hold for three quarters following a tightening in financial conditions that started to spill over to growth. Powell also sought to calm markets, noting that the hard data was on track to sustain good momentum into the New Year and gave a shout out to the strong Payrolls data. He did though acknowledge that financial markets were sending other signals, particularly around China and on policy uncertainty out of Washington and that the Fed is ‘’listening sensitively to the messages markets are sending’’.
In other economic news, Euro-Zone inflation undershot expectations coming in at 1.6% in December down from 2.0% in November and 1.7% expected, though the core measure was steady at 1%, as expected.
The US stock market loved the strong payrolls report, and loved the empathy Jay Powell showed to markets even more, having patently failed to do so out of the December FOMC meeting. Indices added around 2% at the open, post the payrolls and China RRR curt ness, and then added about the same again post Powell. The S&P ended the day 3.4% higher, the NASDAQ 4.3% and the Dow Jones 3.3%. Gains for European stocks were not too far behind. These gains now put all US Indices into positive year-to-date territory, the S&P by 1% and NASDAQ 1.5%. IT was the best performing sector Friday, +4.4% within the S&P.
The VIX index, having been above 35 on both sides of Christmas day, is now back at 21, the lowest since mid-December.
The wild ride for US Treasuries in late December and early January will have bucked many a bond trader off the horse Thursday and Friday. From a low of 2.54% early Friday morning (and which followed the weak manufacturing ISM report on Thursday and the various FX ‘’flash crashes’’ that produced a very large if temporary spike in Bond Futures. 10-year yields ended Friday at 2.67%, so 15bps higher on the day. The 2-year note added 7bps to 2.49% – so bull steepening early last week as the market moved to price in Fed rates cuts before the end of 2019, gave way to bear steepening on Friday.
If ever there was a case of a currency going from zero to hero in the space of 24 hours it was the AUD between Thursday and Friday. AUD/USD was Friday’s best performing currency by far, adding 1.5% to close above 0.71 for the first time since 20th December. The sharp revival in risk appetite typified by the fall-back in the VIX and a smart recovery in commodity prices readily accounts for the move up.
As for Thursday’s ‘’Flash Crashes’’ that at one point saw AUD/USD down to 0.6790 and Cable below 1.25, I am convinced that the rush for the exit on (underwater) short JPY positions by Japanese retail accounts on a day when Tokyo banks were on holiday, was the initial culprit. FX futures volume data for Thursday, published on Friday morning, showed more than three times the prior day’s volume in the five currency pairs that are most active on the Tokyo Futures Exchange (USD/JPY, TRY/JPY, AUD/JPY, ZAR/JPY and GBP/JPY); they were some four times the November daily average.
The JPY was the weakest G10 currency on Friday and only one to fall against an otherwise weaker US dollar; the latter saw the DXY index down about 0.1% which is over 1.5% off its mid-December highs, the sharp reassessment of Fed policy prospects triumphing over heighted risk aversion and so safe haven support in late December.
Most Emerging Market currencies rallied sharply on Friday, the JPM EMCI up over 1%. A key factor here was confirmation that trade talks between China and the US will be resuming in Beijing today.
Commodity markets could not help liking the combination of news of China-US trade talks, strong US payrolls and soothing words from the Fed Chair. In the base metals, copper rallied by over 3% and aluminium just under 2%, iron ore rose over 1% and Brent crude 2% (WTI +1.8%).
This morning on the Economic Front we have Euro-Zone Retail Sales at 10.00 am. This is followed by Durable Goods, Factory Orders and ISM Non-Manufacturing at 3.00 pm. Finally the Fed’s Bostic speaks at the Rotary Club in Atlanta at 5.40 pm.
March S&P 500
The S&P has followed my bullish strategy with the market building value above the 2445 area to close at 2528 before continuing to rally overnight to a so far rebound high of 2551. As I have continually mentioned in my Daily Commentary over the years that the McClellan Oscillator to be one of the best technical signals especially when the MO prints below -250. On the Friday before Christmas we closed at -300 and on Christmas Eve the MO finished at -327 which is one of the lowest prints in history. Subsequently when the Futures Market re-opened on December 26 the S&P made an intra-day low of 2332 before rallying nearly 220 handles off this low print so far. On Friday the MO closed at +220 which is getting near overbought territory. While the S&P did not hit my buy range on Friday some of you may have bought the market especially given the fact that we closed near this key 2445 support level on Thursday evening. Today I will now raise my buy level to 2495/2510 with a 2482 wider stop, as I look for the S&P to rally to 2585/2600 and possibly 2615/2625 where I would exit any long position. Despite the high closing MO I do not want to be short the S&P at this time.
The Euro just missed my 1.1335 buy level before rallying on the dovish comments from Fed Chair Powell and I am still flat. Today I will now raise my buy level to 1.1320/1.1360 with a 1.1280 stop.
March Dollar Index
I am still flat the Dollar which also just missed my sell range on Friday. Today I will now lower my sell level slightly to 96.00/96.40 with a 96.75 stop.
Thankfully we had no sell levels in the DAX so far this year with the market now trading over 350 points higher than the lows from last Wednesday. I am still flat and today I will now raise my buy level to 10620/10680 with a 10565 stop.
The FTSE has made an impressive start to 2019 helped by the fact that the FTSE yield had risen to its highest level in 30 years at 4.5%. I am still flat and today I will now raise my buy level to 6680/6730 with a 6635 tight stop. I still do not want to be short the FTSE at this time.
Dow Rolling Contract
The Dow also followed by bullish strategy perfectly with the market building value above the key 22900 pivot point to close at 23430. I will now raise my buy level to 23150/23320 with a tight 23030 stop. If the Dow can again close over 23100 this evening then we should be able to rally to my next objectives at 23800/23900, 24200 and possibly as high as 24400/24600 over the coming weeks where I would exit any outstanding long positions.
Despite the NASDAQ getting slammed on Thursday on the back of the lower guidance from Apple, the market rebounded to close over 4% higher on strong volume. I am still flat and today I will now raise my buy level to 6280/6340 with a 6230 stop. As long as the NASDAQ can hold the now key 6150 support level we should continue to see higher prices over the coming weeks.
The 15 basis point rally in the US 10 Year Yield saw the BUND finally sell-off from a severely overbought condition. I am still flat and today I will now lower my sell level to 164.70/165.10 with a 165.45 stop.
Gold Rolling Contract
God traded lower to my 1276 buy level. As I was already long Silver I covered this long Gold position too early at 1278 and I am still flat. Gold has strong support from 1257/1267 and today I will be a buyer on any dip to this area with a 1249 stop.
Silver Rolling Contract
My Silver plan worked well with the market trading lower to my 15.60 buy level before rallying to my revised 15.75 T/P level and I am now flat. Today I will again look to buy the market on any dip lower to 15.25/15.65 with a 14.95 stop.