Contrary to my expectations, the US Dollar roared higher after I posted yesterday morning with the Bloomberg Spot Dollar Index closing higher by 0.61%, US 10y Treasury yields testing above 3.09% during the session just and still at 3.072% as I go to print. It was not a stellar tax cut-driven US Retail Sales report for April, nor more aggressive rate hike views from Williams (both with in line with expectations/recent views), nor any overtly hawkish soundings from Fed Governor nominees Clarida and Bowman who were appearing before the Senate Banking Committee with seemingly measured statements.
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Perhaps it has been a re-evaluation of the relative attractiveness of the US yield story (of Europe, Japan, and elsewhere, including Aust/NZ) and momentum/technical-driven moves. The move up in the US 10s came from a combination of broadly equal real and embodied inflation yield increases. On the data, there was a slight undershoot from the first print of German Q1 GDP by a tenth, while US Retail Sales were in line but assisted marginally by 0.1-0.2% point upward revisions. The Atlanta Fed upped its estimate of GDPNow but at the margin for Q2 to 4.1% from 4.0%.
It may well be that a lot of commentary about the USD having topped out over the last couple of days has caught some out on the move. And whether this latest move up can be sustained is to be tested, but it is to cleaner air. We will see if it can garner extended fundamental US data support from here or soft data elsewhere. It was a move higher in the USD against the majors and Emerging Markets, even if the latter is exaggerated somewhat by idiosyncratic issues such as Turkey.
US Retail Sales in April rose 0.3% while the Sales ‘’Control Group’’ that feeds into GDP rose 0.4%, both exactly in line with expectations. Headline sales for March were revised up 0.2%, while Control sales by one tenth. The Empire State Manufacturing Survey for May was 20.1 in May above the 15.8 expected. The NAHB Housing Index remained strong at 70, up from 68. German GDP for Q1 printed at 0.3%/2.3%, missing by a tenth, while UK ex-bonus average earnings were 2.9% in March, up from 2.8%, and line with expectations, and to be fair resilient as was the tenor of the wider UK labour market report, Unemployment still at 4.2% and Employment up smartly. Along with the commodity currencies, the Euro took a hit, but German 10y bund yields still rose 3.4 bps.
The AUD sits at 0.7470/75 this morning, the NZD at 0.6860/65, the NZD off 0.7% notwithstanding a 1.9% rise in the overnight dairy auction prices. Yesterday’s Chinese activity reports were mixed with stronger Industrial Production (7.0%) but misses in Retail Sales (only 9.4%!) and Investment; the AUD was initially unmoved yesterday after the Chinese data, though the RBA Minutes amplified the ‘’no near term pressure for a RBA move’’ message.
The Fed’s John Williams has been speaking and has been speaking of 3-4 rate hikes for this year (2-3 more) as the right direction for policy, as ‘’reasonably balanced’’. He also added that the recent inflation pick-up had been reassuring. None of that would have been any surprise to Fed watchers. He added that if the economy outperforms then it makes sense to hike faster for those looking for a hawkish tilt.
Dallas Fed President Kaplan acknowledged that the Fed was ‘’basically achieving both of our dual mandate objectives’’ and so it should continue moving to towards ‘’neutral’’. As the Fed continues hiking we should expect discussion to intensify around what the Fed thinks that ‘’neutral’’ rate is. Williams said he thought the ‘’new normal’’ for the neutral rate was around 2.5% (he added that he did not expect the fiscal stimulus to have any more than a 0.25% impact on neutral) while Kaplan put it in a range of 2.5-3%.
Appearing before the Senate Banking Committee for their Fed Governor confirmation hearings, both Richard Clarida and Michelle Bowman were measured and not presenting views from what you would expect from such well-credentialed nominees for these posts. Clarida spoke of the importance of the dual employment/price stability mandate and the importance of the Fed’s independence. He has had meetings with Trump and said in questioning from the Committee that he has had no indication of anything to the contrary, nor was he asked by the President how he would vote on rates. Both appear safe/solid choices, Clarida being nominated for Governor and Vice Chair of the Federal Reserve Board, Bowman a Governor nomination.
This morning on the Economic Front we already had the release of German CPI which came in at 0.00% as expected. At 10.00 am we have Euro-Zone CPI and this is followed at 12.00 pm by US MBA Mortgage Applications. Next we have Building Permits and the Housing Starts Index at 1.30 pm. Finally we have Industrial Production at 2.15 pm.
June S&P 500
After eight consecutive higher closes for the S&P, yesterday saw the S&P top out at 2741 which was just shy of my 2745 sell level before the market gave up 40 Handles. The US 10 Year Rate hit a seven year high at 3.09%. This is a worrying development with the next target at 3.74% ahead of 4.00%. It will be difficult for the S&P to trade higher in this environment. Another bearish development was given by the VIX which was trading below its Daily Bollinger Band on Monday only to rally back into the Band yesterday. The last time this happened was on April 17 when the S&P was trading at 2717 before the market fell 100 Handles. To put this development into context, this is only the second time that this has happened in two years. Yesterday the S&P trading the whole of my 2708/2716 buy level for an average buy level at 2712. Once I saw the VIX signal I immediately emailed my Platinum Members to cut any long S&P position at 2714 and I am now flat. The 50 Day Moving Average for the S&P comes in at 2682 and I would expect the S&P to initially rally on any test of this area. Yesterday’s low at 2701 should also offer some support. Today I will be a small buyer on any dip lower to 2693/2702 with a 2688 stop. If I am taken long and subsequently stopped out of this position I will be a more aggressive buyer on any further dip lower to 2675/2683 with a 2668 stop. I will also lower my sell level slightly to 2728/2736 with a 2743 stop which is just above yesterday’s high print.
The major break higher in the 10 Year Treasury saw the Dollar rally strongly. This did not help my Euro position and after the Euro traded lower to my second buy level at 1.1885 for an average long position at 1.1905 I was quickly stopped out of this trade at 1.1855 and I am now flat. With such a low DSI reading I was caught on this trade. If the Euro breaks 1.1800 we could see a quick move lower to the next support level at 1.1705/1.1745 where I will again look to buy the market with a 1.1675 stop. As we are so close to long-term support I want to see how the market reacts here before looking to set up a short position.
June Dollar Index
As I was already long the Euro I waited to sell the Dollar which I did at 93.20. I am still short but not comfortable with this position. Today I will now raise my T/P level on this trade to 93.00 and stand aside. I will now lower my stop on this position to 93.45.
Despite the US Indices getting hit hard yesterday both the FTSE and DAX remained strong with the DAX helped by the weakening Euro. I am still flat the DAX and today I will raise my buy level slightly to 12800/12880 with a 12730 stop. I still do not want to be short the DAX at this time.
My FTSE plan worked well with the market trading higher to my 7710 sell level before selling off to my 7685 T/P level and I am now flat. The FTSE recovered well to close strongly as the market eyes its all-time high at 7745. Despite the overbought conditions a sustained break above 7750 is another buy signal. Given the significance of this resistance area I will be a small seller on any rally higher to 7750/7785 with a 7820 stop. Meanwhile I will now raise my buy level to 7620/7655 with a 7590 stop.
Dow Rolling Contract
My Dow plan worked well yesterday as no matter where you bought the Dow in my buy range you should have made some nice points. Initially the Dow traded lower to my 24720 buy level before rallying 60 points. As I was already long the S&P I waited to buy the Dow at 24690 before emailing my Platinum Members to exit any long position at my revised 24750 T/P level and I am now flat. Today I will again look to buy the Dow on any dip lower to 24520/24630 with a 24450 stop. I still do not want to be short the market at this time.
Unfortunately the NASDAQ just missed my 6990 sell level before falling 100 points and I am still flat. The NASDAQ has good support from 6800/6850 and today I will be a buyer in this area with a 6760 stop. I will now lower my sell level slightly to 6970/7020 with a 7065 stop.
My Bund plan worked well with the market trading lower to my 157.65 buy level before a late rally saw the Bund trade higher to my revised 157.81 T/P level as I wanted to be flat overnight. This morning the Bund is trading back above 158.00. I touched on the breakout in the US 10 year Treasuries in my S&P commentary above. There is every chance that we have now witnessed a major top in the US Bond Market as it was the summer of 2011 when we last saw yields so high. Bond prices fell yesterday as yields rose. There is no doubt from a charting standpoint that bond prices have indeed formed a major top. The next question is when will the Bund follow the US lead. The Bund has huge support at its April low of 157.48 and below here at its February low of 157.30. So a break and close below 157.20 for 2/3 days should see an acceleration lower in the Bund. Today I will again look to buy the Bund on any dip lower to 157.10/157.50 with a tight 156.80 stop.
Gold Rolling Contract
The rising Dollar saw Gold finally break and close below its 200 Day Moving Average at 1303 which is bearish and a sell signal. I was on IG TV yesterday and it was interesting to see that 85% of their clients are long Gold which ties in with my view that everyone I know is long this market. Yesterday Gold traded the whole of my buy range. I went long at 1293 and this morning I emailed my Platinum members to exit any long position at 1294.80 and I am now flat. I will use any rally to 1308/1315 to go short with a 1322 tight stop. The next good support for Gold comes in at 1270/1275.
Silver Rolling Contract
No change as I am still long at 16.50 with a now lower 16.55 T/P level. I will continue to look to add to this position at 16.10 with the same 15.85 tight stop. If my second buy level is filled before my T/P level I will then lower this T/P level to 16.35.