Markets opened the new week relatively flat. Japanese wage inflation data and the services PMI are due up later. China remains on holiday. A deal on the Trans-Pacific Partnership is expected to be announced today, we look at what it means as well as at the latest CFTC data.
Early in the week the focus is on Australia with the RBA meeting Oct 6. There is little talk of a rate cut but officials could signal the potential for further easing later in the year. Economic data was mixed with the AiG service sector index falling to 52.3 from 55.6%. That was balanced by TD Securities inflation expectations rising to 1.9% from 1.7%.
AUD/USD is up 5 pips at 0.7049.
A central bank that's more likely to act this month is the BOJ so every Japanese data point will be scrutinized. At 0130 GMT it's the August Japanese labor cash earnings report. It's expected to rise just 0.6% y/y, down from a 0.9% rise the month before and further away from Japan's inflation target. That will be followed 5 minutes later but Japan's services PMI from Nikkei. The prior reading was 53.7. Ashraf's latest take on the next BoJ meeting is in the current USDJPY Premium trade.
What you need to know about the Trans-Pacific PartnershipIt's a 12-nation free trade-type deal aimed at diminishing trade barriers. The participating countries are the United States, Chile, Singapore, Australia, Peru, Vietnam, Malaysia, Mexico, Japan, Canada and Brunei. It has been negotiated in secret. If a deal is struck today the text will be released and national parliaments will have a year to ratify the agreement.
The TPP could also further extend the US trade deficit with Japan once the US lifts hefty tariffs on cars and trucks. US winners are likely to be big oil and chemicals seeking to expand investments in Malaysia.
Markets will closely watch details on agriculture, manufacturing, intellectual property and pharmaceuticals. Companies in those industries may react to the details, but currencies could also shift if national industries – like New Zealand dairy – are perceived to be under threat, or in a position to expand.
Commitments of TradersSpeculative net futures trader positions as of the close on Tuesday. Net short denoted by - long by +.
EUR -88K vs -81K prior JPY -22K vs -24K prior GBP -2K vs +1K prior AUD -49K vs -53K prior CAD -42K vs -38K prior CHF -3K vs -2K prior
Last week, US dollar net longs fell to their lowest in a year but they bounced back slightly this week, mainly on yen and commodity currency selling. With the sharp deterioration in Fed hike hopes, the US dollar remains vulnerable on the downside.
|Markit PMI Composite (SEP)|
|55.3||Oct 05 13:45|
|Markit Services PMI (SEP)|
|55.6||Oct 05 13:45|
|ISM Non-Manufacturing PMI (SEP)|
|58||59||Oct 05 14:00|
|TD Securities Inflation (SEP) (m/m)|
|0.3%||0.1%||Oct 04 23:30|
|TD Securities Inflation (SEP) (y/y)|
|1.9%||1.7%||Oct 04 23:30|
|Labor Cash Earnings (AUG) (y/y)|
|0.9%||Oct 05 1:30|
On June 15, I wrote an IMT (unpaid part of this website), pointing out to the 40-month cycle in USDJPY, implying that USDJPY has already seen the peak. Since then, the pair has fallen by more than 400 pips in at least three occasions. Yes, it has also rebounded few times, but selling the bounce has proven more rewarding than buying the dips. Here is the JUNE 15 CHART. Some may say the problem with such long-term cyclical analysis is timing. That's where the role of momentum charts comes in to back up our Premium trades, which we use to confirm and update our central thesis with the rationale part of each trade. The addition of 1-2 per week videos for our Premium subscribers has been instrumental in fitting a lot of ideas & saving me writing. The last two Premium trades in USDJPY produced more than 200 pips each. Friday's market reversal comprised a crucial development to our central thesis. The next 3 weeks will witness a bloody battle bwteen bulls and bears. All of this will be broken down in this week's Premium trades, charts & videos. Good luck & be careful.
The US September jobs report deals a significant blow to the notion of a 2015 Fed hike--against which we consistently disagreed throughout the year – as it achieved the gloomy feat of disappointing across the board -- headline rate (first back-to-back months of sub 200K in 18 months), downward revision in prior months (-59K), notable decline in average hourly earnings, and the unchanged unemployment rate was offset by the decline in the participation rate to a fresh 38-year lows.
Especially sobering about this report is just when the Fed had been increasingly shifting attention towards slowing inflation metrics under the assumption that labour market metrics will continue improving, this happens.
The door to Fed lift-off has been shut beyond Q1 2016 as the extended weakness in the world's biggest buyer of commodities, combined with the erosion of the “Gulf Nations' Put” as well as the decline in EM FX reserves is a de facto tightening of equity and bond markets.
China and EM have done the Fed a huge favour by saving it from committing a monumentally embarrassing rate hike, against which we warned in our Sep 28 note:
“The rate of deterioration in the debt profile of energy and mining companies is far from that reached by sub-prime lenders in 2007-2009. But the situation is getting worse. A Fed hike would be a costly and embarrassing policy error".
US 10-year yields have extended losses below the all-important 200-day moving average as well as the 55-200 WMA confluence, but we expect gradual stabilisation to ensue near 1.87%, before rebounding to as high as 2.25% later this quarter. Escalating worries of a unsustainable EM debt and a global recession in late Q1 will force bond yields back below 1.90%, until we reach 1.10% in Q3 2016.
|Average Hourly Earnings (SEP) (m/m)|
|0.0%||0.2%||0.4%||Oct 02 12:30|
|Average Hourly Earnings (SEP) (y/y)|
|2.2%||2.4%||2.2%||Oct 02 12:30|
|Unemployment Rate (SEP)|
|5.1%||5.1%||5.1%||Oct 02 12:30|
We take a closer look at the US oil supply story today after a $2 whipsaw on crude prices as Hurricane Joakim approaches New York. The Canadian dollar got a boost from crude and was the top performer while CHF lagged. Australian retail sales are next.
Forecasts showing Joakim headed towards New York harbor early next week boosted crude early in the day and then new forecasts showing it moving further North reversed the trade. The oil market has a history of kneejerk reactions to temporary supply disruptions from storms but they should be used as opportunities to sell because the dynamics of the US market have changed.
A decade ago, much more of US oil was imported via the Gulf of Mexico, which is always vulnerable to hurricanes. There is a heavy offshore drilling presence there as well. But two factors have made the US oil market far less vulnerable to what happens in the ocean. 1) The rise of Canadian oil exports 2) The explosion of US shale. Storms have virtually zero impact on that production so for the foreseeable future, Hurricane-driven spikes will be opportunities to sell. Premium subscribers will obtain a special pre-NFP edition of the Premium Video at about 21:00 EDT (02:200 BST) to go through selected strategies, existing and new trades.
In the bigger picture, US oil storage supplies are virtually overflowing. This is the time of year that US oil supplies at the main hub in Cushing usually trough. As we head into October, refineries shut down for maintenance and to transition to more heating oil and less gasoline. But current supplies at Cushing exceed any pre-2015 point for the past 15 years.
Storage capacity will be maxed out in the coming months and crude will be dumped onto the market at any price. That has severe negative implications for the Canadian dollar and the latest bounce may prove an opportunity to sell.
In the short term, it's the Australian dollar in focus with retail sales at 0130 GMT and expected to rise 0.4%. Interestingly, October is seasonally the best month of the year for the Australian dollar and one of the worst for CAD.
|Retail Sales (AUG) (m/m)|
|0.4%||-0.1%||Oct 02 1:30|
A lot has happened since that fateful October bottom in stocks, which was driven by a multitude of factors namely, market worries over end of Fed QE and escalating casualties from the Ebola virus. But those were only worries and not factual manifestations of data weakness. Today, the extended weakness in the world's biggest buyer of commodities, combined with the erosion of the “Gulf Nations' Put” as well as the decline in EM FX reserves is a de facto tightening from in and capital markets.
These are only some of the factors, which prompted a 180° downturn since the mid-October lows, dragging the S&P500 down 12% in a mere 27 days, following +17% in as many as 149 days from the October lows to the May highs.
As the market gradually makes its ways back to the October lows, it is important to contrast the situation between now and then.
Greater USD FalloutThe USD may have stabilised against the euro and yen, but in trade-weighted terms, it has gained an additional 14% against most major currencies since October, exacerbating the currency translation effect for US multinationals and increasing the price for US exports in the global market place. The situation is especially ominous when considering surging costs of USD-denominated loans in emerging markets, especially in Asia where the USD has risen 8% against a basket of Asian currencies since October. In China alone, more than $900 bln in USD-denominated debt remain unpaid. Not to mention the IMF warning about surging EM debt.
Nearing DisinflationMost market and survey-based measures of US inflation are lower than in October 2014. Unlike survey-based inflation measures, which are provided monthly, break-even rates priced off US inflation-protected bonds are available daily, with the 2-year BE tumbling near 8-month lows at 0.23% and 5-year BE rates at 1.1%, nearing its 6-year lows. These inflation measures have been criticized for being too sensitive to oil prices. But the Fed now risks being behind the curve in pre-empting deflation as real yields surge.
No Magic from BoJ, ECBTwo weeks after global yields and share prices plummeted in midOctober, the Bank of Japan surprised the world with a rare split 5-4 decision in its policy board to accelerate the monthly purchases of Japanese government bonds so that its holdings increase at an annual pace of 80 trillion yen. Two weeks later, the European Central Bank signalled to markets that quantitative easing and negative interest rates would finally be pursued.
Markets' reaction to these events was a 2-month rally in global shares, which eventually stalled in January 2015 as the New Year gave its first hint of impending deflation.
China Devaluation = Antithesis of ECB, BoJ QEsChina today is far weaker than it has ever been over the last 15 years. Most services and manufacturing surveys indicate a contraction, while exports have declined for the 5th month over the last seven months, driving down currency reserves to two-year lows. Tying the yuan to the rising USD has worsened the situation since October.
Last month's CNY devaluation may have been a slight stimulus for China, but its impact on the rest of the world is the antithesis of QEs from the BoC and ECB. And once again, do not forget the disappearance of the MidEast out after reports that Saudi Arabia's Monetary Authority has withdrawn as much as $70 bn over the past six months. If you thought injections from MidEast and FarEast SWFs were instrumental in stabilizing global markets in 2007-9, then contemplate the reverse effect of these flows as Saudi Arabia and Qatar consider selling (known as restructuring their portfolios) to withstand budget imbalances resulting from falling energy prices.
We expect the October low to be revisited, before it is taken out for the next leg in what will become a bear market.