Record Close For The S&P As Bonds Rise And The US Dollar Recovers

Originally published by AxiTrader h2 Market Summary/h2

A new record close for the S&P 500 (2,477 – up 7points or 0.29%) and higher US bond rates (10-year Treasuries up 8 bps to 2.33%) are the big story of the night for markets.

Those moves come after US consumer confidence rocketed higher, earnings continue to surprise on the topside, and the US Senate has begun a debate on the removal of Obamacare. Of the three I’m most interested in the potentially game changing nature of this vote.

These moves also helped the US dollar recover from new lows for this move after German Ifo shot the lights out. Its made strong gains against the yen and Swiss franc, and fought back against the other majors. The Australian dollar is still sitting above 79 cents at 0.7933 this morning.

On commodity markets it has been a huge night. Iron ore turned around yesterday in Chinese trade but this is nothing compared to the moves in oil and copper which rose 4.8% and 3.9% respectively. Gold is under a little pressure as a result of the stock and bond move and when taken together with moves in the yen and Swissie it’s clear this is a bit of a risk on move overnight.

So the washup is that SPI traders are punting on a good day ahead for the local market having marked prices up 39 points overnight.

Now for Australian inflation data, a speech from Governor Lowe, and the Fed tomorrow morning.

• BIG NEWS: John McCain is back in town and the Senate is voting on the repeal of Obamacare. A little after 5am this morning news broke that US vice-president Pence had broken a tie on the floor and voted to open debate on the repeal. The question of what exactly is being voted on remains uncertain. But if something gets up this is a big, big deal, for US politics, the President, and the Trump agenda. One thing worth noting, something I hadn’t considered enough, is that this plan shows that Congressional Republicans appear to take seriously the promises they have made the electorate for the past 7 years about Obamacare.

• That’s a point that the political strategist from ISI Evercore made to Tom Keene and David Gura in the Bloomberg Surveillance podcast I listened to on the way down to Sydney yesterday afternoon. Keene grilled this fellow hard (sorry I missed his name) about his view that we are all too Trump focussed and that he doesn’t matter as much to Congress as all the press coverage suggests. I guess the deal Saturday between Republicans and Democrats in the House over Russia sanctions makes this point.

• But keep an eye on this Senate debate – it could shift the needle on expectations about the Administration’s agenda. And that folks would be huge for stocks, the US dollar, interest rates, and the Fed.

• DATA: Last night’s release of Consumer Confidence in the US certainly suggests that your average Joe and Josephine in the US hasn’t given up on the president or the outlook. The Conference Board said the July read on confidence surged to 121.1 from 117.3 in June to make it the second highest print this century. Washington, the President, is not the real game here folks – its jobs. And US consumer are pretty comfortable right now.

• Also out last night was the Case Shiller house price data. You’d be forgiven for thinking it was a poor number based on the headlines I’ve read. But with a year over year gain of 5.7% in May after an upwardly revised 5.8% print for April the data is actually pretty solid.

• And speaking of solid, how about German business confidence. My goodness! The Ifo survey of 7,000 businesses came in at a new record high of 116 in July from June’s already solid 115.2. Ifo chief Clemens Fuest lost the run of himself a little saying that “Sentiment among German businesses is euphoric”. That’s probably over-egging it but there is no denying his other comment that “Companies' satisfaction with their current business situation reached its highest level since Germany's reunification. Their short-term business outlook also improved. Germany's economy is powering ahead”. Seriously good data.

• And data in the UK was also encouraging with the CBI reporting that factories in the UK increased production at the fastest rate since 1995. Reuters reported that “the Confederation of British Industry's quarterly balance for manufacturing rose to +31 in the three months to July, the highest reading since January 1995 and up from +22 in the three months to April”. It’s a little weird that new orders slowed a little as did export orders, but there is no doubt this is a solid result.

• CENTRAL BANKERS: Ewald Nowotny was at it again overnight saying the time for the ECB to reduce its stimulus is here. Nowotny said it’s now “wise to gently step off the gas pedal”. He’s right of course. But it’s complicated given the euro's surge and the uneven pace of growth across the region. But recall “sources” told Reuters last week October is the next big chance for the ECB to change tack. They’ll be hoping US data has lifted again by then and maybe the Fed has set out its balance sheet tapering plans as well.

• Reuters reports the two new members of the BoJ are on board with Governor Kuroda’s approach to monetary policy. Both Goushi Kataoka, and Hitoshi Suzuki said there is still plenty of room between current inflation and the 2% target. Suzuki added “From my own experience of dealing with markets for 20 years, starting a debate on exit now would be dangerous to markets”. And as if on cue USD/JPY is back up near 112.

• President Trump told the WSJ that he sees both Janet Yellen and his economic adviser Gary Cohn are the leading contenders to lead the Fed.

• Caterpillar (NYSE:CAT) reported results, beating earnings and lifting guidance as China – in particular – has lifted demand for the companies product. This is a good indication that global growth is still doing well. So it’s worth remembering the IMF is forecasting strong and synchronised growth for the globe this year and next.

• And while I’m talking about yellow metal a G20 backed global infrastructure initiative has release a report saying the world needs $94 trillion in global infrastructure investment by 2040. That’s trillion with a T folks. We all got excited about the $1 trillion Trump plan. Imagine the medium to long term impact of this type of investment.

• The local market bounced back yesterday gain 38 points, 0.68%, to close at 5,726. That rally wiped away Monday’s losses as the entire market, save for the telecommunication services sector, was higher. Last night SPI traders have had another run at it with a rise of 42 points, 0.75%, from the close yesterday.

• It’s hard to argue against the prospect of this rally on the ASX today. The S&P has made a fresh record high as corporate America continues to confound low GDP growth with solid earnings growth. We’ve seen a solid rally in copper and oil, iron ore turned around, and the buyers were back buying US financials overnight. So there is every chance we see a broad based rally in the local market at the open.

• Whether or not that manifests as the 35 points the SPI traders are guessing at depends in no small part on just how worried traders are about the inflation data and RBA governor Lowe’s speech today. My sense is both will underlie a neutral outlook for policy in the months ahead.

• 5,710/30 is resistance in SPI terms at the moment.

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• But the Anika Foundation lunch was usually the most important speech of the year – the most influential, scene setter – for Lowe’s predecessor Glenn Stevens. So I wonder if governor Lowe will follow this lead. If he does it is going to be hard for him to temper the emerging excitement about the Australian economy at the moment. The focus on headwinds has given way to a recognition the outlook the NAB business survey, and jobs market points to is suggestive of the RBA’s own bullish forecasts for growth.

• Certainly inflation in Australia – like other developed markets – remains quiescent. That’s a point Lowe is likely to highlight as he tries to restrain expectations about rate hikes and a stronger Aussie dollar. He’s likely to highlight that this lack of inflation gives the RBA room to let the economy evolve without having to raise rates soon. And he’s likely to highlight and reiterate Guy Debelle’s message from last week that this higher AUD/USD, and TWI, IS complicating the economic transition and outlook. But as I noted yesterday in my Aussie dollar piece it is looking increasingly difficult for the RBA to argue against its own bullish forecasts on the outlook for Australian growth.

• Lowe needs to send a clear signal the inflation outlook and low wages growth give the RBA plenty of room to leave rates where they are. And ultimately he has to hope the US dollar will turn around