Sep 18, 2016 - FOMC meeting (Sep 20-21) – a discussion about exit strategy, really?

Now or in Dec? Data are ok, we are not all 100% sure yet but… should we wait until Dec? Hmm, Trump president, data might be worse, lots of international risks like Spanish elections, referendum in Italy or Brexit going wrong…our credibility…hmm…

Few words about current developments:

-          The market expectations for a rate hike in Sep are around 20% and 50% for Dec but we should more see it as either a dovish hike or hawkish no hike. Meaning Fed will either hike but will have dovish comments or will not hike and will refer to Dec with some wording about data dependency…etc.

-          Apart from present market risk related to uncertainty and very low predictability of Fed’s actions market is watching underlying data to get some hints about economic growth, inflation and employment. As the economy is getting closer to full employment, the GDP and CPI/PCE numbers are gaining importance.

-          Steepening of the yield curve at longer end – we may see it as market reshuffling over to shorter term maturities based on rate hike expectations

-          Division of the FOMC officials – of course as always is the case

Our expectations:

-          Our base view is one hike in Sep and eventually second one in Dec if data support. Please read more on:

Jackson Hole coming, but what about the rate hike…?  and  US job market - Full time vs. Part time employment

-          The GDP growth may not be at the level all Fed officials would like to see, eventually we may have a different picture after elections but the economy is overall growing and doing well

-          The question about full time employment is also off the table as almost all FOMC members share the same view that the economy is close to full employment with unemployment rate at 4.9% vs 4.8% (Fed’s full employment rate)

-          The only question is inflation - the headline PCE and core PCE. The Fed’s projections show expectations at 1.9% for 2017 and 2% for 2018. The last figures were at 0.8% and 1.6% y/y respectively.

-          As the inflation is lagging the economic growth and monetary actions, we see that the rise of prices is on the right track. Do not forget about still very low oil prices, that housing market is stabilizing and that the costs of medicare will not be a huge contributor to PCE due to administrative measures in place.

-          All in all – data is good enough to support the Sep hike, restore the credibility of the Fed, confirm its data dependency and independence ahead of US elections as well as avoid another round of confusion as we had witnessed last year

-          Fed officials will likely avoid facing the risks of no hike this year (as per risks described on top of the page) and vote for a 0.25% rate hike from almost a zero level what is from a historical perspective completely irrelevant level

-          By gradual hiking (starting in Sep) they will create a room for rate cuts if necessary, to face recession risks in the future. Doing that will also allow to push away discussion about negative rates in US. 

-         From a completely different perspective a rate hike would mean the beginning of the return to normal monetary policy, breaking the dependence on central bank funding, pushing for fiscal and structural reforms, and more innovation 

-         The reaction of the markets – let’s have a look at S&P 500. There is something strange going on as US stocks should be much lower to our taste before a rate hike. Is Fed cooking something for us?

-         The rate hike may be a confirmation for the markets that the US economy is doing well. Of course the initial reaction will be a small pullback that will be followed by a strong rally.

-        In case of no hike, we can see a stop hunting rally and a huge sell off after. Exactly the opposite to what markets are expecting at the moment.

Well, any questions just ask…

Good luck Champs!

Mr Hawk

DISCLAIMER: This material was created for informational purposes only and represents the Land of Trading team’s view of the past and current economic and capital market environment. It is not an investment advice and should not be viewed that way at all, and the creators of this material cannot be held liable for any potential losses resulting from trading, where despite this disclaimer someone would consider this material as an investment advice. All rights reserved ©2016. Contact: landoftradingATgmailDOTcom

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Aug 28, 2016 - Weekly Macro 35W

In the coming week we will get plenty of PMI´s and also US employment data. First we will start however with US inflation, more accurately with the indicator mostly watched by the Fed – The Personal Consumption Expenditures. While year on year the Core CPI is already at 2.2% and would exceed the Feds inflation target justifying another rate hike, the Core PCE is only at 1.6% and couldn´t get any closer to the Fed’s target since April...

Last Week

After a boring Monday the European PMIs and New Home Sales from the US were supposed to bring some volatility into the lazy summer markets the next day. While the European PMI data came out mixed on Tuesday, the latest US New Home Sales caused a big surprise coming out at 654 tsd. as we haven`t seen such number since 2008. The construction sector is an important component of US GDP its share on the US GDP is declining and therefore any sign of revival is very important. However, on Wednesday the Existing Home Sales in the US came out worse than expected as failed to hold the 5.5 million level. The increasing Crude inventories surprised the market and caused a drop in WTI testing again the $46.5/barrel, USDCAD didn`t react much on the news despite the dependence of Canada on the oil industry. On Thursday the market focused almost purely on the awaited speech of Janet Yellen in Jackson Hole schedule for Friday and ignored the weak German Ifo Business Climate and the better than expected Durable Goods Orders which increased in the second fastest pace in the last 27 months. On Friday the kind of hypnotized trading mode continued. The GDP estimates from UK and US where in-line with expectations and the market reacted little. The rock`n`roll started after Yellen`s speech. While she said the case for rate hike strengthened in recent months at the end stressed the outlook is still uncertain, and rate hikes are not on pre-set course. The US labor market is close to maximum employment and the FOMC anticipates further strengthening. Regarding Fed Funds Rate, Fed anticipates gradual rate increase. According to Yellen the Board of Fed governors see inflation rising to 2% in the next few years (keep in mind that inflation is measured by Fed by Core PCE Price index) and they are not considering higher inflation or nominal GDP targets. After initial half an hour confusion finally the market translated the message (together with several Fed governor statements during the day) as hawkish. USD strengthened in the last few hours of the trading week 1.1% against EUR and GBP, more than 1.7% against JPY and AUD and 2.1% against NZD.

Next week

Monday (USD, JPY):

On the first day of the week Jackson Hole Symposium will probably resonate all over the marketplace. Also the Personal Consumption Expenditures will be released, which is the Feds inflation indicator. While year on year the Core CPI is already 2.2% the Core PCE is only at 1.6% and no change is expected for Monday but looking at the bullish mood on USD from Friday, any positive surprise can easily cause further dollar strengthening. Before midnight we will take a look at the spending of the Japanese households. The notoriously weak private spending is a key problem of reaching the BoJ`s inflation target.

Tuesday (AUD, GBP, EUR, USD, CAD):

Early morning AUD traders should be ready for some volatility as the Building Approvals missed estimates in the last 2 months. The data is a leading indicator to inflation and growth and will be watched closely. The RBA cut the cash rate on the 3^rd of August by 25 bps and while there is no expectation that the RBA will cut again on the next rate decision scheduled for the 6^th September. During the day plenty of European data will be announced, but early afternoon the Canadian Trade balance numbers will show us if there is any tendency to get into positive territory where the economy was last time in 2008. Later the Conference Board Consumer Sentiment survey will be released. As it´s a leading indicator to US economic activity this could be the data of the day.

Wednesday (NZD, EUR, USD, CAD):

Early morning the ANZ Business Confidence, the result of a survey of about 1500 companies will be released in New Zealand. Could be important as kiwi finished the week with a shooting star on the weekly chart confirming a kind of engulfing pattern (not clear) a few weeks ago however it couldn’t close below key support 0.7200. In the morning we will have important data from Europe, German Retail sales and Unemployment change first, and later the Eurozone flash Inflation could spur the EUR. In the afternoon we will focus on the US ADP employment and 1.5 hour later the Chicago PMI with Pending Home Sales. According to Yellen the US employment is close or at its maximum so there could be a lower reading in ADP but Pending home sales could surprise to the upside as last week´s Existing Home Sales were weaker than expected and the key could be in the number of the unfinished purchase contracts. The Monthly GDP from Canada is expected to be well in positive territory after a negative surprise last month. Later the EIA Crude inventories will affect the CAD as well.

Thursday: (CNY, AUD, EUR, GBP, USD):

It`s going to be a PMI day and even the market will be waiting for the NFP next day, there could be interesting moves. Especially the Chinese Manufacturing PMIs where the 50 point level is the threshold of recession. The official PMI dropped below 50 pts last time but the Markit PMI hold above. Between these two data the Australian Retail sales and Private Capital Expenditures will be released. As the last rate cut had practically zero effect on AUDUSD, this could give us a hint whether there is a chance for further rate cuts in the fall. We will continue the day with the Spanish, UK and US ISM manufacturing PMI, from these the later has the biggest potential to move the markets. The US jobless claims and US Non-Farm Productivity released in between the PMIs could give a hint if Yellen was right on Employment last Friday.

Friday (GBP, CAD, USD):

One of the most watched US number will be released in the afternoon, the US Non-Farm Payrolls. However, in the morning we will have first the UK Construction PMI. Very important if we think there is a bubble in the UK property market. Even though the last reading showed a slight improvement, the trend in the sectors PMI is not encouraging. While in the first half of 2014 the figure was above 55 points each months, in 2015 hardly could reach this number and the average was around 52.5 and this year only twice reach 52… The US NFP is expected to hold but as the economy is near full employment, there could be come negative surprise.

Have a successful week and don’t forget:

Watch you risk and be consistent in your trading!

Mr TechMan

DISCLAIMER: This material was created for informational purposes only and represents the Land of Trading team’s view of the past and current economic and capital market environment. It is not an investment advice and should not be viewed that way at all, and the creators of this material cannot be held liable for any potential losses resulting from trading, where despite this disclaimer someone would consider this material as an investment advice. All rights reserved ©2016. Contact: landoftradingATgmail.com

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