US Dollar Recovers Early Weakness On Expectations Of A Fed Rate Hike

Originally published by AxiTrader h2 Quick Recap/h2

The odds of a Fed hike have firmed up after last night’s data, the ECB is leaking that it will still be buying bonds next year, oil slid even though inventories fell more than expected and the Aussie dollar was hammered, really belted back from 77 cents for the 9th time in recent months. The bears really have a bone to pick up there it seems.

• US stocks are mixed as specific company news drives divergent results for the Dow Jones Industrial Average (+0.17%) and the S&P 500 (-0.17%). The Nasdaq 100 is down 0.63% as Apple Inc (NASDAQ:AAPL) weighed.

• Whether it was the contraction in the trade deficit, the solid rise in the Markit flash services PMI, or new home sales data they all pointed to a confirmation that the Fed will be hiking rates at its December meeting.

• But as Mohamed El-Erian points out in a column overnight this Fed is less scary for markets, and as a result less supportive of the US dollar, because this will not be the linear progression of rate rises we’ve seen in the past. Rather he said the Fed would pursue a stop start approach to raising rates until – and this is the really interesting piece – the US saw the return of more inclusive growth. I think that is the point of Janet Yellen’s idea that the Fed could run the US economy hot.

• And it’s clearly an emerging train of thought aimed at combating the economic circumstances that underlie the rise of populist political movements in the US and around the globe.

• Elsewhere on the data front – Russsian Business confidence hit a 9-month low. That still suggests to me that Russia will indeed end up playing ball with OPEC. There economy needs higher prices.

• Reuters has a story quoting ECB sources who say the bank is all but certain to keep buying bonds when the current date for the end of QE passes next March. The sources also discussed plans the bank is looking at to change its bond buying rules to allow it to continue to buy at lower rates than it is currently allowed to in order to make available enough bonds for it to conduct its programs.

• Speaking of programs an adviser to Japanese PM Shinzo Abe says the government should consider more fiscal stimulus to get the economy going.

• The UK GDP is out tonight. Lloyds (LON:LLOY) last night defied the doomsayers and traders and economists will be looking to this data tonight, 0.3%, and 2.1% expected, to gauge the impact of Brexit. Don’t forget though the BoE said they’ll ignore positive data because they think bad stuff is still coming down the pipe for the UK economy.

• 83 points, 1.5%, that was the unexpectedly brutal fall on the S&P/ASX 200 yesterday. Reading reports and talking to my mates in the stock market nad it seems clear that there are plenty of little catalysts for the selling, Wesfarmers Ltd (AX:WES), CPI meaning less chance of an RBA rate cut, and so on but not grand unifying theme for the weakness.

• My sense is still that the short term day traders have the tiger by the tail and are throwing the market around. As evidence I offer both the lack of correlation with overnight moves in the US over recent days and then this little 4-hour chart of the SPI 200 with a few simple trendlines drawn in.

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• Overnight the SPI 200 is up 8 points in a late surge after being down 1 point until around 7am. That makes sense with the heavy selling on the ASX yesterday eclipsing anything we have seen overnight or across the globe in a major market over the past 24 hours.

• To me that selling was overdone and I expect a bounce today back toward the previous 5380 support and maybe even 5400/10. I say that even though we have seen falls in energy, basic materials and financial sectors in the US overnight.

• National Australia Bank Ltd (AX:NAB) results today will be important…very important.

• We’ve probably already done the CPI to death. But headline lift of 0.7% even with all the usual codicils about what caused it is a good number for the economy because of the message it sends to consumers and business about a potential turn in the inflation cycle. Inflation expectations are important for the RBA so even with low inflation – and the headline rate of 1.3% for the past 12 months I still super low – the RBA is less likely to cut rates on this number.

• But they are likely to retain an easing bias because both inflation is still low AND even with rubbery data it does look like the employment market has materially softened as well.