US inflation in focus with bond markets increasingly key

US inflation in focus with bond markets increasingly key

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  Weekly Outlook Monday 8thOctober 2018 by Richard Perry, Market Analyst Forex and CFDs are high risk leveraged products that can result in losses greater than your initial deposit and you should therefore only speculate with money you can afford to lose. FX and CFD trading are not suitable for everyone. Please ensure you fully understand the risks involved, seeking independent advice if necessary prior to entering into such transactions. You should first carefully consider your investment objectives, level of experience, and risk appetite and only invest funds you are prepared to lose entirely. For our full risk warning, please go to the end of this report. Key Economic Events WHEN: Thursday 11th October, 1330BST LAST: Headline CPI +2.7%, Core CPI +2.2% FORECAST: Headline CPI +2.4%, Core CPI +2.3% Impact: Signs of inflation are building in the US economy. After last month’s surprise jump in earnings growth record levels of the ISM Non-Manufacturing data point to strongly expanding activity and bond yields have spiked higher. The 5yr 5yr forward expected inflation is ticking higher again. Will this now begin to show through in the hard data? The CPI may not be the Fed’s preferred inflation measure but with consensus forecasting a drop on headline, but an uptick on core CPI, any upside surprise will certainly get pulses racing in the bond markets. Treasury yields will be reactive and the dollar too. Date Time Country Indicator Consensus Last Mon 8th Oct ALL US US public holiday – Columbus Day Wed 10th Oct 0930BST UK GDP (monthly) +0.1% +0.3% Wed 10th Oct 0930BST UK Industrial Production +1.0% +0.9% Wed 10th Oct 0930BST UK Trade Balance -£10.9bn -£10.0bn Wed 10th Oct 1330BST US PPI (headline / core) +2.8% / +2.5% +2.8% / +2.3% Thu 11th Oct 1230BST Eurozone ECB monetary policy meeting accounts n/a n/a Thu 11th Oct 1330BST US CPI (headline / core) +2.4% / +2.3% +2.7% / +2.2% Fri 12th Oct 0300BST China Trade Balance (Imports / Exports) +$21.0bn (+15.0% / +9.1%) +$27.9bn (+19.9% / +9.8%) Fri 12th Oct 0800BST China Foreign Direct Investment +2.3% Fri 12th Oct 1500BST US Michigan Sentiment (prelim) 100.5 100.1 T: +44 (0) 20 7036 0850 │ E: [email protected] │ W: hantecfx.com 1N.B. Please note all times are British Summer Time (BST) i.e. GMT +1. Data: Reuters Macro Commentary Markets seem to have misread the Fed at its September meeting. Yields fell after the FOMC meeting and spent the next week subdued, questioning the removal of the word “accommodative”. However this all changed on comments from Jerome Powell last Wednesday. Real interest rates have only just gone above zero (Fed Funds range is 2% to 2.25% whilst inflation is around 2%) and Powell noted that interest rates are still accommodative but that the FOMC is gradually moving to a place where they will be neutral. “We may go past neutral – but we’re a long way from neutral at this point, probably”. Further rate hikes ahead but, “If we see things getting stronger and inflation going up then we might move a little quicker.” That makes incoming data crucial – especially on inflation. The timing of these comment drove yields sharply higher as it came on the same day that the ISM Non-Manufacturing posted a record high. Friday’s payrolls report was a touch mixed, however a headline miss will surely be Hurricane Florence related and unwound next month. Average Hourly Earnings slipped to 2.8% as expected, but any data going forward that is now inflationary could help to pull yields further higher. All eyes will therefore be on the prices data for both producers (PPI) and consumers (CPI) this week. Risk appetite is certainly linked to rising yields, with an increasingly risk averse move seen across equities and forex, whilst emerging markets are again under pressure. If US inflation surprises to the upside, strap yourselves in, it could be a bumpy ride. Must Watch for: US CPI US inflation charts Core CPI expected to tick higher again but headline CPI to fall back would help real wage growth.
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  Weekly Outlook Monday 8thOctober 2018 by Richard Perry, Market Analyst Foreign Exchange A sharp rise in Treasury yields threatens an outlook changing move on the US dollar. For several weeks a top pattern has threatened on the Dollar Index, but this seems to have been aborted on a recent rally. Dollar moves are now driven by two factors. First is that the euro has underperformed on concerns over the Italian budget and bond yield differentials. This has helped the dollar as c. 56% of Dollar Index is euro weighted. The other has been the spike on Treasury yields which not only have driven the dollar higher through yield differentials but also a safe haven bid. Treasury yields got little further rocket fuel on Friday from the mixed payrolls report and it may begin to even see yields slip back in the coming days. This would be dollar corrective. But also watch out for Italian politics playing a role in the performance of the euro. Despite the Italian government guiding for reduced debt to GDP from 2.4% in 2019, to 2.2% in 2020 and 2.0% in 2021. However the market is sceptical over the Italian’s government’s elevated expectations for GDP growth (almost 0.5% above consensus forecasts). How Italian yields move will generate performance of the euro. Spreads over German 10yr Bund yields are stretching close to 300 bps, but real concerns would not develop until 350/400 bps. One final factor in forex majors is sterling outperforming coming into the new week. Brexit politics and solving the Northern Irish border is crucial here as chinks of light appear in the darkness of the negotiations. WATCH FOR: Trade tariffs developments as ever, Italian politics for risk appetite, PMIs and payrolls T: +44 (0) 20 7036 0850 │ E: [email protected] │ W: hantecfx.com 2 FX Outlook GBP/USD Watch for: Brexit remains a key driving factor as the technicals become increasingly uncertain Outlook: A strong end to last week the early drop away again on sterling reflects the increasingly choppy moves on Cable that are taking hold. Taking a step back though we see that Cable has now built a seven week uptrend with the key low at $1.2920 now forming support. There is an uncertain look to momentum indicators with RSI and MACD fluctuating around neutral however the Stochastics ticking higher again with arguably a bull cross helps to give the smallest of bull biases. How Cable treats this growing uptrend this week and holding on to the psychological $1.3000 will be a start. Resistance to watch for renewed bull sentiment is at $1.3215. EUR/USD Watch for: The old support of $1.1500 has become a key gauge now. Outlook: A euro sell-off in the past couple of weeks has stabilised but having broken the old support above $1.1500 the market is teetering on the brink of a near to medium term break that could pull the market back to test the support of the August low at $1.1300. Momentum has taken on a far more corrective configuration recently and comes with the MACD lines falling below neutral, RSI below 40 and the Stochastics looking bearish. Whilst this continues the pressure will be on, with a bear bias and the market will be selling into strength. A decisive move back above $1.1600 is needed to defer this outlook.
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  Weekly Outlook Monday 8thOctober 2018 by Richard Perry, Market Analyst Equity Markets The impact of the sharp upside move on Treasury yields is being impacted across financial markets and this is driving selling pressure through bond markets. The usual course events would see rising yields being fairly positive for equity markets as investors switch out of bonds and into equities. However this is a feature of a risk positive move, where moving out of the risk free asset class to take advantage of higher risk equities. However, when yields spike higher on inflation fears this is risk negative and subsequently equities come under selling pressure. Aside from the broad risk aversion, sharp rising inflation expectations is negative for equities, as the FOMC may have to accelerate its hiking cycle to combat the forces of inflation (according to FOMC chair Powell). This is a similar situation as to what was seen during the January peaks of the stock markets around the world. The driver that time was a surge in US earnings growth. The DAX lost almost 1600 ticks (-12%) in just three weeks, whilst FTSE 100 lost 660 ticks (over 8%). There was also a huge explosion in volatility as to the massive jump on the VIX volatility. This time around, the earnings growth did not surprise sharply higher in Friday’s payrolls, and whilst the VIX has increased, by no means is the move out of control. This still has the potential to drive equity markets lower, and the moves higher on Treasury yields need to be watched closely now. However, for now there is still a supportive outlook on Wall Street. Key levels to watch for trigger points for a decisive turn lower on equity markets come with the S&P 500 falling below 2864, the DAX below 11,865 and the FTSE 100 below 7220. For now key lows remain intact. WATCH FOR: US Treasury yields are key, whilst US CPI inflation could be a trigger T: +44 (0) 20 7036 0850 │ E: [email protected] │ W: hantecfx.com 3 DAX Xetra Watch for: A closing break below 12,100 opens a move to the September low at 11,865. Outlook: A renewed bout of selling pressure has taken the DAX sharply lower in recent sessions. The support band 12,100/12,130 has been decisively broken early this week. The medium term negative configuration on momentum comes through now with the RSI failing at 60 and gaining downside momentum, MACD lines crossing lower around neutral and Stochastics also finding traction. A closing break of 12,100 would open further weakness to test the September low at 11,865. Rallies within a downtrend channel are a chance to sell this week. FTSE 100 Watch for: Selling momentum is beginning to grow, looking set for a test of the September low Outlook: The market has come under significant strain in recent days as equity traders have become increasingly fretful of the sell-off on bond markets. Technically, FTSE 100 has rolled decisively lower is breaking below the old long term pivot at 7300. The concern is that momentum is increasingly corrective, with the RSI recently failing at 60 and MACD lines crossing lower below neutral, whilst all suggest there is further downside potential in this move. A retest of the key September low at 7220 would now be seen in the coming days. Index Outlook
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  Weekly Outlook Monday 8thOctober 2018 by Richard Perry, Market Analyst Other Assets: Commodities & Bonds The dollar strength is clearly a key factor on the price of gold still, with the negative correlation at play. However with Treasury yields blowing higher, there is an added market fear factor that means that gold gets a degree of safe haven bid as well. This may help to restrict a gold sell-off. Oil is still supported by the prospect of Iranian sanctions, however it was interesting to see Iran complaining about Saudi and Russia breaking the terms of the production cuts by raising their levels. Then there is the impact of the bond market sell off that helps to dive dollar strength. A stronger dollar could begin to weigh on oil, but also if there is significant risk aversion then this would impact on global demand expectations and also restrict the oil rally. There is still plenty of room to unwind the WTI/Brent Crude spread (currently c. $10). Bond yields are suddenly all important once more. The spike higher on Treasury yields is getting traders across the financial markets concerned and this is driving risk aversion. The US 10 year yield burst above 2.13% last week to a new 7 year high, on the fears over inflation building in the US economy. It was interesting to see this move helped to steepen the US yield curve once more. Is this a turning point? In Europe, the Italian budget impacting on Eurozone yield spreads is still an issue, with 286 basis points of Italian 10s over German 10s still very high. This is a negative impact on the euro. WATCH FOR: US inflation expectations and CPI on US yields and commodities. T: +44 (0) 20 7036 0850 │ E: [email protected] │ W: hantecfx.com 4 Gold Watch for: The six week trading range looks set to continue with a mild bear bias ongoing Outlook: Those hoping that there may finally be some decisive direction coming out of Friday’s Non-farm Payrolls report would have been disappointed. The risk averse market reaction to the yields and dollar strength have effectively cancelled each other out, however there is a mild run of lower highs within the range which suggests a slight bear bias which could see a pull towards the range lows again. Momentum indicators reflect this mild negative bias, but there is little decisive direction so far. A decisive close below $1180 would be bearish, whilst a close above $1217 would be bullish. Markets Outlook Brent Crude oil Watch for: An unwinding move back to the seven week uptrend would be healthy Outlook: Brent accelerated higher in the past couple of weeks, but the signs of a correction are coming after the momentum had become historically stretched. A pause in the trend could give rise to a bout of profit-taking and a corrective move in the coming days. The RSI recently reached 78, a level not seen since the market bottomed in January 2016 and the highest since 2012. An unwinding move would help to renew upside potential and there is plenty of support with the 7 week uptrend at $81.50 today, whilst the long term breakout at $80.50 is also a basis of support. Forecasts for $90 may need to be put on hold for now.
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  Weekly Outlook Monday 8thOctober 2018 by Richard Perry, Market Analyst T: +44 (0) 20 7036 0850 │ E: [email protected] │ W: hantecfx.com 5 Risk Warning for Financial Promotions This report is issued by Hantec Markets Limited, who is authorised and regulated by the Financial Conduct Authority (FCA) in the UK, No. 502635. The report is prepared and distributed for information purposes only. Trading in Foreign Exchange (FX), Bullion and Contracts for Differences (CFDs) is not be suitable for all investors due to the high risk nature of these products. Forex, Bullion and CFDs are leveraged products that can result in losses greater than your initial deposit. The value of an FX, Bullion or CFD position may be affected by a variety of factors, including but not limited to, price volatility, market volume, foreign exchange rates and liquidity. You may lose your entire initial stake and you may be required to make additional payments. Please ensure you fully understand the risks involved, seeking independent advice if necessary prior to entering into such transactions. Before deciding to enter into FX, Bullion and/or CFD trading, you should carefully consider your investment objectives, level of experience, and risk appetite. You should only invest in FX, Bullion and/or CFD trading with funds you are prepared to lose entirely. Therefore, only your excess funds should be placed at risk and anyone who does not have such excess funds should completely refrain from engaging in FX and/or CFD trading. Do not rely on past performance figures. If you are in any doubt, please seek further independent advice. This report does not constitute personal investment advice, nor does it take into account the individual financial circumstances or objectives of the clients who receive it. All information and research produced by Hantec Markets is intended to be general in nature; it does not constitute a recommendation or offer for the purchase or sale of any financial instrument, nor should it be construed as such. All of the views or suggestions within this report are those solely and exclusively of the author, and accurately reflect his personal views about any and all of the subject instruments and are presented to the best of the author’s knowledge. Any person relying on this report to undertake trading does so entirely at his/her own risk and Hantec Markets does not accept any liability. Trust Through Transparency Hantec House, 12-14 Wilfred Street, London SW1E 6PL T: +44 (0) 20 7036 0850 F: +44 (0) 20 7036 0899 E: [email protected] W: hantecfx.com