Intraday Market Thoughts Archives
Displaying results for week of Jul 27, 2014Falling Yields Obstruct USD Rally for now
The three elements of disappointment in today's jobs report emerged from the 209K in July NFP (vs expected 230K & previous 298K), the 6.2% unemployment rate (first increase in five months) and soft average hourly earnings (2.0% y/y vs expected 2.2%) are sufficient in allaying fears of premature Fed hike. But here are 5 positives.
| Act | Exp | Prev | GMT |
|---|---|---|---|
| Unemployment Rate (JUL) | |||
| 6.2% | 6.1% | 6.1% | Aug 01 12:30 |
| Average Hourly Earnings (m/m) | |||
| 0.0% | 0.2% | 0.2% | Aug 01 12:30 |
Who to Trust? Stocks or FX
We look at why a divergence emerged in stocks, bonds and FX on Thursday and what it means ahead of non-farm payrolls. Despite the 2% fall in the S&P 500, the Canadian dollar was the top performer and ranges were tight. A few indicators and a central bank speech will be released in Asia. A new set of Premium Insights will ve issued prior to the Nonfarm payrolls to leverage existing trades.
A few factors contributed to the stock market selloff:
The failure to make a deal (so far) in Argentina
More trouble at Portugal's Banco Espirito Santo
The sense that the Fed will eventually turn more hawkish
Earnings, to some extent, but there are always good/bad earnings
What undermines those factors is that the FX and bond market didn't react in unison. It's rare for stocks to lead a genuine risk rout so until we see more evidence, we're unconvinced it will last.
So the main factor might have been the end of the month. Fund managers hate to show losing trades and a trickle of window dressing might have turned into a flood as the move gathered momentum. At the same time, the Chicago PMI at 52.6 compared to 63.0 added a fundamental worry to the picture.
What's interesting is that despite the poor PMI, the employment component actually increased in July and that bodes well for Friday's non-farm payrolls report. There's some risk that a very strong report will stoke worries about rate hikes but ultimately more jobs will be seen as good news.
The market will continue to hunker down ahead of NFP but in the meantime some headlines could keep markets moving. The main one will be the Chinese official manufacturing PMI at 0100 GMT. The consensus is for a slight improvement to 51.4 from 51.0.
Thirty minutes later Australian PPI data for Q2 is due. Inflation concerns are low at the RBA and the report probably won't change the picture.
The final event to watch is a speech from BOJ leader Kuroda at 0330 GMT. The latest data has been weak and he could take a dovish line in an attempt to weaken the yen.
| Act | Exp | Prev | GMT |
|---|---|---|---|
| Nonfarm Payrolls (JUL) | |||
| 235K | 288K | Aug 01 12:30 | |
| Chicago PMI | |||
| 52.6 | 63.0 | 62.6 | Jul 31 13:45 |
| Markit Manufacturing PMI (JUL) | |||
| 57.3 | Aug 01 13:45 | ||
| ISM Manufacturing PMI (JUL) | |||
| 56.0 | 55.3 | Aug 01 14:00 | |
| PMI (JUL) | |||
| 51 | Aug 01 1:00 | ||
| PMI (JUL) | |||
| 50.7 | Aug 01 1:45 | ||
| Producer Price Index (Q2) (q/q) | |||
| 0.9% | Aug 01 1:30 | ||
| Producer Price Index (Q2) (y/y) | |||
| 2.5% | Aug 01 1:30 | ||
Ashraf's Webinar Tonight
Ashraf's webinar starts today at 16:30 Eastern Time (21:30 London) “Currency, Debt & Equity Markets with Fari Hamzei (stocks, indices and market timing) CLICK on REGISTRATION LINK. After registering you will receive a confirmation email containing information about joining the Webinar.
Fed Hawks Grounded Despite Soaring GDP
New York traders filled the thermos with coffee ahead of a busy day that started with ADP employment. The report added little to the debate at 218K compared to 230K expected. It was a small miss but close enough to expectations to keep the good news on the jobs front intact.
The surprise came shortly afterward when the first reading on Q2 US GDP was +4.0% compared to 3.0% expected. Q1 was also revised to 2.1% from 2.9%. There were some caveats in the report including a large build in inventories but the overall picture was strong and the US dollar climbed 30-80 pips across the board.
Like we warned, the market has repeatedly bet on a hawkish shift at the Fed and the non-stop talk ahead of the announcement was that it might finally come. But once again Yellen failed to deliver. The statement acknowledged some improvement in the economy but emphasized a significant underutilization of labor resources.
The good news for the hawks was a nod that inflation has moved somewhat “closer” to the long-run objective. The immediate reaction was still disappointment and the dollar pared a portion of its gains.
Ultimately the Fed remains on a slow path toward a more hawkish policy and that will drive the US dollar higher but you have to wonder if now's that time. For instance, USD/JPY has risen in 9 consecutive sessions and it might be a time for a pullback.
The headlines in the hours ahead will focus on Argentina. The country is in last minute negotiations to avoid a default. It's a complicated situation and the market has leaned heavily in the past two days toward a positive solution but anything is possible.
If Argentina defaults it will ultimately be contained but it might give markets an excuse to retrace some recent moves.| Act | Exp | Prev | GMT |
|---|---|---|---|
| GDP (Annualized) (2Q) [P] | |||
| 4.0% | 3.0% | -2.1% | Jul 30 12:30 |
| GDP Price Index (2Q) [P] | |||
| 2.0% | 1.8% | 1.3% | Jul 30 12:30 |
| ADP Employment Change (JUL) | |||
| 218K | 230K | 281K | Jul 30 12:15 |
A Rotation Trade Hidden in the Fed Talk
The market will be transfixed on the news and releases in the day ahead but below the surface a little-talked-about trade might be poised to have a bigger impact.
Chinese shares have surged 6% in the past week and some related products have seen massive volume spikes. Rumors of market liberalizations are fuelling the gains but we wonder where the money is coming from.
Over the last two years money flooded into Europe and propped up the euro but that money might be looking for a new home. Fund managers like Bill Gross have proclaimed the end of the bull market in periphery bonds as Spanish 10-year yields fall below 2.5%. Lately, equities have also cooled off.
Could that hot money be leaving Europe and heading for China? That sort of flow would help explain the persistent weakness in the euro and strength in the dollar.
It's something to monitor but for now the focus now shifts to a number of major releases. Markets will begin to simmer with the release of June prelim Japanese industrial production at 2350 GMT. The consensus is -1.2% m/m and -5.2% y/y. Soft employment and retail sales data yesterday raised risks for further easing from the BOJ and kept the yen under pressure despite risk aversion.
That will be followed by German CPI, ADP employment, US GDP and the FOMC decision. Markets may be hesitant to react to any single release but watch for an extended move over the following days as traders digest the news.
Ashraf previewed those events and more earlier.| Act | Exp | Prev | GMT |
|---|---|---|---|
| Industrial Production (JUN) (m/m) [P] | |||
| -1.2% | 0.7% | Jul 29 23:50 | |
| Industrial Production (JUN) (y/y) [P] | |||
| 1% | Jul 29 23:50 | ||
| Retail Trade (JUN) (y/y) | |||
| -0.6% | -0.5% | -0.4% | Jul 28 23:50 |
| Retail Trade s.a (JUN) (m/m) | |||
| 0.4% | 4.6% | Jul 28 23:50 | |
| Germany CPI (JUL) (y/y) [P] | |||
| 0.8% | 1.0% | Jul 30 12:00 | |
| Germany Harmonised Index of Consumer Prices (JUN) (y/y) [P] | |||
| 0.8% | 1.0% | Jul 30 12:00 | |
| Germany CPI (JUL) (m/m) [P] | |||
| 0.2% | 0.3% | Jul 30 12:00 | |
| Germany Harmonised Index of Consumer Prices (JUL) (m/m) [P] | |||
| 0.3% | 0.4% | Jul 30 12:00 | |
| ADP Employment Change (JUL) | |||
| 230K | 281K | Jul 30 12:15 | |
| GDP Annualized (Q2) [P] | |||
| 3.0% | -2.9% | Jul 30 12:30 | |
| GDP Price Index (Q2) [P] | |||
| 1.8% | 1.3% | Jul 30 12:30 | |
Firming USDX, NFP to Overshadow FOMC
The most important week of US economic releases before the “unofficial” start of summer is kicking off with a bang as US consumer confidence hit a fresh 7-year high in July at 90.9, following June's 86.4. Consequently, the US dollar extends its 3-week winning streak ahead of the week's key figures. Full charts & analysis.
| Act | Exp | Prev | GMT |
|---|---|---|---|
| CB Consumer Confidence (JUL) | |||
| 90.9 | 85.3 | 86.4 | Jul 29 14:00 |
Rising Risks Everywhere, Watch Japan Later
A few risks are mounting in days ahead but not always in the most-obvious spots. The Australian dollar was the top performer while its kiwi counterpart lagged. The focus shifts to Japan later with jobs and retail sales due. We have a very bullish chart. What does this chart represent? http://twitpic.com/e92dwq
Markets were lackluster to start the week but trading will surely pick up. Cable gained after 8 days of declines but ranges were small with EUR/USD trading in just a 17 pip span to start the week.
With risks mounting, volatility is sure to ramp up in the days ahead:
It's growing clear that global hostilities in Ukraine are rising. Putin did not use the Malaysian Airlines tragedy as a reason to de-escalate and the White House said more sanctions are coming this week. Argentina appears to be losing interest in negotiations with creditors as Thursday's deadline approaches. The only options are default or seek a delay but a technical default has probably risen to a 20% probability and the consequences are always hard to predict. The main risk is the Fed. FOMC voter Richard Fisher wrote an op-ed in the WSJ calling for a more hawkish stance, including a taper of portfolio reinvestment. We emphasize that expectations for change are extremely low so the market could be complacent. Economic data: GDP and NFP are the main ones but the market is losing faith in the US economy.
In the near term, a pair of Japanese data points could give markets a nudge with employment and retail data due. First at 2330 GMT is the jobs report but it rarely offers the kind of fireworks of NFP. The unemployment rate is expected to remain unmoved at 3.5%.
At 2350 GMT, it's the June retail sales report and this is more likely to give markets a jolt with sales expected up 0.8% m/m but down 0.5% y/y
| Act | Exp | Prev | GMT |
|---|---|---|---|
| Retail Trade s.a (JUN) (m/m) | |||
| 4.6% | Jul 28 23:50 | ||
| Retail Trade (JUN) (y/y) | |||
| -0.5% | -0.4% | Jul 28 23:50 | |
| Unemployment Rate (JUN) | |||
| 3.5% | 3.5% | Jul 28 23:30 | |
Clue to our Eid Pop Quiz أي سوق يُمَثل هذا الرسم البياني؟
Wishing you happiness, peace & prosperity in occasion of Eid ul Fitr al Mubarak. This chart below looks very bullish. Guess what it is. And it's not related to Swissy.
أي سوق يُمَثل هذأ الرسم البياني الذي على وشك كسر صعودآ؟ كل عام و انتم بخير
Big USD Week, EUR Net Shorts Soar
The US dollar is poised for liftoff but it needs something, anything, from the Fed to light the ignition in the week ahead. Last week sported the unusual pattern of the Australian dollar as the top performer with the kiwi lagging – boosting one of our Premium trades. The latest CFTC data showed a surge in euro shorts.
Last week ended with a durable goods orders report that was much weaker than the 0.7% headline suggested. Excluding defense and aircraft, both orders and shipments were weak due to sharp downward revisions. That led to some re-issued Q2 GDP forecasts and added downside risks to the 3.0% consensus in the first look at Q2 on Wednesday.
The main events in the week ahead are the FOMC decision and Friday's jobs report. The market has been burned a multitude of times for betting on a slight hawkish shift from Yellen that never seems to come. With the employment market continuing to improve it's growing difficult to justify rates so low.
Commitments of Traders
Speculative net futures trader positions as of the close on Tuesday. Net short denoted by - long by +. EUR -89K vs -63K prior JPY -54K vs -63K prior GBP +27K vs +39K prior AUD +39K vs +40K prior CAD +21K vs +16K prior CHF -7K vs -6K prior NZD +15K vs +15K prior
It doesn't take much to get the euro bears excited. They piled into shorts after the break of 1.3500, driving the euro net short to the most extreme since Nov 2012. The other notable move was the quick shift out of the pound. Traders were slow to warm up and now appear quick to exit with Carney sending mixed signals.
