US Data Disappoints

Originally published by AxiTrader

Market Summary

US retail sales and inflation data on Friday night were weaker than expected knocking the Citibank economic surprise index to its lowest level in a year and undermining sentiment on the US economic outlook. That in turn saw bond rates drop and the US dollar come under a little pressure.

But as has become usual US stock market traders took the news in their stride with only mild falls for the S&P 500 (-0.14% to 2,390) and the Dow Jones Industrial Average (-0.11% to 20,896) while the Nasdaq 100 preferred to follow the European lead and finished in the black, up 0.09% at 6,121.

And speaking of European stocks, they may come under a little selling pressure when they open this afternoon given the FTSE 100 closed at a record high of 7,435 after rising 0.66%. The DAX in Frankfurt, CAC 40 in Paris, and MIB in Milan were all up a little more than 0.4%.

The washup is that SPI traders have marked prices up 6 points for the open this morning after Friday’s 0.7%, 41 point, fall to 5,836. We’ll see.

On forex markets the Aussie is sitting at 0.7388 this morning after rising to 0.7420ish Friday before dipping into the close in what was an overall weaker US dollar environment. That’s seen the yen strengthen with USD/JPY down at 113.11 while euro is at 1.0925 and the pound is at 1.2878. The swissie also strengthened – close to one per cent – and USD/CHF is at 1.0005. The kiwi is still clinging to the very important 68 cent zone and is at 0.6842 this morning.

On commodity markets iron ore was absolutely crushed last week and the selling didn’t let up into week’s end. That was despite copper lifting a little on the back of Chinese central bank liquidity operations which suggest they are managing speculation not trying to rein in growth. Gold has found a short-term base and is back at $1228 while oil remains supported as we move toward the next OPEC meeting and the expected extension to the production cuts.

Chinese data today will kick this week off with a bang with the release of retail sales, industrial production, urban investment, and foreign direct investment all out. Markets have been a little worried about the trajectory for Chinese growth so this will be an important pointer.

Home Loan data here in Australia is likely to garner plenty of interest as well given the RBA and APRA’s efforts to rein in lending and what that might mean for the banks.

Here's What I Picked Up (with a little more detail and a few charts)

• S&P 500 -4 (0.14%) 2390 (7.23 Sydney - change since previous day)
• Dow -23 (0.11%) 20896
• Nasdaq +5 (0.09%) 6,121
• SPI 200 +6 (0.10%) 5,817
• AUD/USD 0.7386 (+0.16%)
• Gold $1228
• WTI Oil $47.84 Flat

International

• US data wasn’t terrible on Friday but it did undershoot expectations which is what matters for markets – well at least markets other than stocks right now. Inflation for April printed 0.2% to bring the year on year rate to 2.2%. But core price rises undershot with a 0.1% rise and a 1.9% yoy print. Retail sales disappointed – and fits the current narrative of the US retail malaise – coming in at 0.4% against expectations of a 0.6% rise in April. That saw the yoy rate drop to 4.5% against expectations of 5.2%. As I say neither set of data is terrible but the fact it undershot has some questioning the bounce back in Q2 they expect.

• And of course, the continued collapse of the Citibank Economic surprise index gives many of us pause. So bond’s and the US dollar both fell with the US 2 year rate at 1.29% and the 10 year bond rate back at 2.33% from last week’s move above 2.4%.
  

• North Korea – watch this space folks. The Hermit Kingdom launched another missile over the weekend and US Ambassador to the UN Niki Haley said this was no way to sit down with president Trump (a reference to his recent tweet saying he’d meet with Kim Jong-Un) and that clearly the North Korean leader was feeling the pressure. She added – I’m paraphrasing – Kim Jong-Un was in a state of paranoia and the US would continue to turn the screws. I’m always minded both of game theory and what happens when you back a rat into a corner in these situations.

• The Trump administration is actually getting stuff done – in the maelstrom of the sacking of FBI director James Comey – and everything else that has gone on in Donald Trump’s still short presidency – it is easy to think nothing is getting done. But Commerce secretary Wilbur Ross and his department has just done a bilateral deal with China which opens up some specific markets to US firms. Natural gas, credit cards, and beef markets in China have been – or will be – opened up to US firms from July 16 this year. Explaining the deal to Bloomberg on Friday morning US time Ross said the US made a list, the Chinese made a list and they agreed the things that could be agreed quickly. It’s another sign the administration is still trying to implement it’s agenda. And yes, Ross knows these three markets won’t fix the US-China trade deficit but he highlighted that every bit of opening moves the US in the right direction.

• France – Emmanuel Macron has been sworn in as president over the weekend. And the impact of his win might be exemplified by Angela Merkel’s party which appears headed to victory in Sunday’s state election in North Rhine-Westphalia. If, as is likely the case, the win in Germany’s most populous state has a signal for this year’s federal election in Germany then Mrs Merkel – and the EU project - is gaining in strength.

• And speaking of Germany and the EU project – German finance Minister Wolfgang Schaeuble said over the weekend that fiscal transfers may be what’s need for the Union to work more effectively as the strong support the weak.

• China’s central bank seemed to show it’s hand Friday with its open market operations pointing to continued pressure on short term speculation where it failed to provide funds over medium term funding where it did inject cash. It’s a subtle but very firm signal that it’s not trying to hurt growth just knock the more speculative and random aspects out of the economy. That has implications for commodities and stocks as we have seen lately.

• Chicago Fed president Charles Evans said the Fed could set in place the tapering of the balance sheet later this year and conduct operations monthly to bring it down to the size it is looking for. Interestingly he said at least one more hike not the two I might have expected.

• Oh, and watch the presidential election in Iran coming up this week. It’s important because the incumbent – Hassan Rouhani, a moderate by Iranian standards - is facing off against a number of candidates with his two biggest rivals hard liners. He got stuck into them over at the last presidential debate which shows how much pressure he is under. How the election goes is important geopolitically and for oil and gold I’d reckon.

Australia

• It was an awful close to the week for Australian stocks Friday. But it could have been worse. I say that because the low Friday was essentially the same level as the low earlier in the week when the banks first collapsed in the immediate aftermath of the Budget revelations on the nex tax on their wholesale funding. From a pure charting point of view that level 5,815 is now critical to the outlook.

• A break would signal a move to 5,764. But critically it would signal that traders and investors are giving up on what many thought would be a triumphal run to 6,000. But recall ages ago that the technical target I talked about was not 6,000 but 5,950. So that has been achieved and a pullback is not unexpected. 5815/5817 is the 38.2% zone from the 2017 so this level is crucial.
  

• But hopefully it could be a better week for the local market. We get the release of the RBA minute, which are likely to be upbeat on Tuesday, and Thursday’s employment report should be solid if the NAB business survey employment sub-index has any predictive power. Today though bank stock traders will be watching the lending data closely. It’s for March so it may not show the aggressive actions of regulators just yet. But important nonetheless.

• Fitch and Moody’s affirmed Australia’s AAA rating on Friday. No big deal really but the government will be pleased that it doesn’t have to deal with this issue at the moment.

Forex

• It’s funny how forex traders care more about US data than stocks traders do. But I guess forex traders don’t get the benefit of being invested in stocks which have shown very solid year on year growth which has printed much stronger than expected over earnings season. All forex traders can go on is relative interest rate and economic outcomes.

• So it’s worth noting that while the US economic surprise index collapses the EU version in contrast remains strong. With a print of 69.5 the EU version of Citibank’s Eco surprise index shows how the EU continues to confound expectations of weakness. It doesn’t mean the EU is strong per se – just stronger than expected. And that’s what matters to forex traders.

• But what also matters is what the relative central banks say and do. And on that front ECB governing council member Philip Lane told Reuters Friday that while the “tail risk” was fading their was still downside risks to the EU economy. It’s another sign the ECB is where the fed was a couple of years back. Watching the recovery, hoping it gains traction, and unwilling to do anything to derail it other than note the pick up.

• So this morning we have Euro at 1.0927 much stronger than the mid to low 1.08 region it was hovering in late last week. Sterling is at 1.2883 after what was the first down week in a month last week after the BoE was a little more dovish than traders thought likely.

• But in some ways it’s the move in the Yen (113.13) and Swissie (1.0005) which have both materially improved from last week’s weakness that tells us the US dollar remains under pressure. At least until the data turns or the focus returns to the fed’s expected rate hike next month.

• For the Aussie this morning’s level of 0.7386 is a little disappointing after the run to 0.7420. But that is where resistance lies and the moves in EM currencies like the Mexican peso and the still struggling kiwi and CAD tells you this is not an Australian specific resistance the Aussie keeps running into.

Commodities

• Gold appears to be trying to build a base above $1214. While that level holds the move to $1194 is on hold. Fundamentally with the Iranian election, North Korean missile launch, and fading support – at least rhetorically – for the US stock market rally – gold should retain it’s bid. And while the level highlighted holds a rally could be in the offing. But unless or until gold trades above $1233 the current downtrend remains intact.

• 17 week’s. That’s how many consecutive week’s that baker Hughes has reported the US rig count grew. And it’s this fact and the production that speaks of from US oil that is keeping a lid on crude prices at the moment. At $47.84 for WTI and $50.84 for Brent crude is making an attempt to drive higher. Increasingly it is looking certain there will be a production cut extension at next week’s meeting. But I wonder if that’s baked in the cake meaning OPEC might need to pull a rabbit out of the hat to get prices sustainably back above $50. Technically though while above $47 WTI looks in good health for a run.

• Copper improved Friday buoyed a little by the Chinese central bank actions which suggest its speculation, not the economy, the PBOC and authorities are targeting. It’s at $2.52 but still in a downtrend.

Have a great day's trading.