The US dollar is paring yesterday’s gains while the 10-year Treasury yield has slipped back below the 2.70% level
Japanese unemployment unexpectedly ticked up to 2.8% from 2.7%; in the eurozone, Q4 GDP was in line with expectations
The shape of the dollar’s pullback will give better indication of whether or not the long overdue technical correction is at hand
Hungary central bank is likely to keep all rates steady; Mexico Q4 GDP is expected to rise 1.6% y/y
The dollar is broadly weaker against the majors on Turnaround Tuesday. Swissie and yen are outperforming, while Aussie and Nokkie are underperforming.
EM currencies are mixed. RUB and TRY are outperforming, while KRW and IDR are underperforming.
MSCI Asia Pacific was down 1%, with the Nikkei falling 1.4%. MSCI EM is down 1.1% on the day, with the Shanghai Composite falling 1%.
Euro Stoxx 600 is down 0.5% near midday, while S&P futures are pointing to a lower open.
The 10-year US yield is down 1 bp at 2.68%.
Commodity prices are mixed, with WTI oil down 0.6%, copper down 0.5%, and gold up 0.4%.
The US dollar is paring yesterday’s gains while the 10-year Treasury yield has slipped back below the 2.70% level after pushing above 2.73% briefly.
European bonds have also eased, with yields one-two basis points lower. It is thus far a mild Turnaround Tuesday, but suggests that the market psychology that has driven the dollar lower and yields higher persistently since mid-December has not been broken.
One implication is that since these markets do not act in a vacuum is that equities will likely also recover, though it is not evident yet. The MSCI Asia Pacific Index pulled back by a little more than 1% for the largest loss since early December. No regional market was unscathed, though the regional leader has been Korea’s KOSDAQ and it was down marginally (almost 0.7%), leaving it up 15.3% so far this month. The Hong Kong Enterprise Index that tracks China’s H-shares fell nearly 2% to bring this month’s gain to a still-amazing 14.4%.
In Europe, the Dow Jones Stoxx 600 gapped lower. It is trying to fill that gap in the early turnover, but all the main bourses are still lower on the day, and the S&P 500 is trading about 0.25% lower.
The news stream is picking up. Japan reported employment and consumption, while the focus in Europe is on Q4 GDP and Germany’s preliminary inflation reports ahead of tomorrow’s advance estimate for EMU. In the US, the focus is on President Trump’s first State of the Union speech.
Japanese unemployment unexpectedly ticked up to 2.8% from 2.7%. It appears to have been driven by people leaving jobs, which in this context is a sign of tightness in the labor market. Jobs-to-applicants rose to a new high of 1.59 from 1.56.
On the other hand, overall household spending was poor. In December, it stood at -0.1% year-over-year.
The median in the Bloomberg survey was for a 1.3% rise after 1.8% in November. Retail sales held up better, rising 0.9% rather than fall by 0.4% as the median had forecast.
In the eurozone, Q4 GDP was in line with expectations. It rose 0.6% q/q for a 2.7% y/y rise. The asymmetrical risk we thought was on the upside, but this impulse was picked up in Q3, with an upward revision to 0.7% from 0.6%.
German states reported January CPI figures and the national one will be reported shortly. German inflation typically falls in January. A 0.7% decline is needed to keep the y/y pace steady at 1.6%. The risk may be on the down side after the state reports.
The shape of the dollar’s pullback will give better indication of whether or not the long overdue technical correction is at hand. A move above $1.2440-$1.2460 might see the euro re-challenge its recent highs above $1.25 and probe into the band of technical objectives that extends from around $1.26 to $1.28.
Sterling needs to overcome the $1.4120-$1.4160 area to reignite the move higher. Most observers cannot feign surprise that new official studies suggest that under numerous scenarios, the UK will be poorer after Brexit. A break of the JPY108.00-JPY108.30 would be understood as extending the greenback’s slide. The key level in the Dollar Index is a little below 89.00.
Hungary central bank is likely to keep all rates steady. For now, the bank is focusing on unconventional measures to boost the economy. For instance, the central bank recently tweaked its interest rate swap facility in an effort to bring down long-term interest rates. CPI rose 2.1% y/y in December, right at the bottom of the 2-4% target range.
Mexico Q4 GDP is expected to rise 1.6% y/y. Growth was only 1.5% y/y in Q3, the slowest since Q4 2013. Monthly indicators suggest Q4 growth near 1.5% y/y, yet price pressures remain high. The firmer peso may give the central bank leeway to stand pat for now. Next policy meeting is February 8.
In one of those rare turns, the term “globally synchronized growth” actually means what the words do. It is economic growth that for the first time in ten years has all the major economies of the world participating in it. It’s the kind of big idea that seems like a big thing we all should pay attention to.
In The New York Times this weekend, we learn:
A decade after the world descended into a devastating economic crisis, a key marker of revival has finally been achieved. Every major economy on earth is expanding at once, a synchronous wave of growth that is creating jobs, lifting fortunes and tempering fears of popular discontent.
It’s that last one where the narrative takes on its current tinge of desperation. After the “unexpected” downturn in 2015-16 that sparked widespread global “discontent” at the ballot box, many in the so-called establishment wish for it to have been illegitimate; nothing more than the world’s xenophobic racists allowing their xenophobia and racism to undermine tighter and beneficial globalizations.
That’s ultimately the problem, though. There wasn’t supposed to have been any downturn at all; in 2015-16, or any other period. In fact, what really sparked populism is that to this day there isn’t any official acknowledgement that anything was wrong at the time, a microcosm of whole last decade. Even this “globally synchronized growth” is an attempt at a whitewash; the populists were wrong, it is now claimed, when they tried to turn “transitory” negative factors into something more than they were.
But it’s always the optimistic side that does that, the very thing many people at the electoral margins are simply fed up with. In fact, we’ve been here before. Just three years ago in late 2014 and early 2015 the explicit idea of “global growth” was just as ubiquitous. We are supposed to notice the difference, this later addition of synchronized economies as if that was the temporarily missing piece.
The problem with that view is the same one as we’ve witnessed all along. Does it matter whether eight of the ten largest economies are growing at a slow, painful rate, while two are contracting, or instead where all ten are now growing at the same slow, painful rate? The occasional minus sign is what many believe is key, but that’s the wrong focus. There is a meaningful difference between positive numbers and growth. There is no difference between lackluster, low-level plus signs and lackluster, low-level minuses.
Swinging back and forth between them over the period of several years would drive any population to seek alternatives. Doing so especially where the upturns are every single time characterized as the big one simply demonstrates nobody has any real answers. It’s the same fingers crossed strategy that has been implicit from the day Ben Bernanke told Congress subprime was contained. Almost eleven years later, it still isn’t.
There are several ways to check these assumptions. Given what is supposed to be behind any of them, monetary policy, inflation is one important weak spot.
No tidy, all-encompassing narrative explains how the world has finally escaped the global downturn. The United States has been propelled by government spending unleashed during the previous administration, plus a recent $1.5 trillion shot of tax cuts. Europe has finally felt the effects of cheap money pumped out by its central bank.
As noted on numerous occasions before, Europe’s inflation rate is far too closely correlated with the American (or Chinese). Thus, if Europe’s “cheap money” is working, then it’s spillover should be apparent there and here. It isn’t.
The BEA reported last week that the US PCE Deflator slowed slightly in December 2017 despite another healthy (seeming) contribution from energy. At just 1.70% year-over-year (compared to 1.77% in November), that’s the 66th time out of the last 68 months the PCE Deflator has failed to register 2%. Given the Fed’s actual mandate, sustained 2% inflation, they are coming up on 6 full years of continuous failure. That’s some really cheap cheap money.
More important than past failure is that there really isn’t any indication this is about to change. The addition of the term “synchronized” is intentional on that count. Core inflation rates like the PCE Deflator exclusive of food and energy, or the Dallas Fed’s trimmed mean measure, clearly lack for price momentum no matter all that.
This is an important omission, because in the past bouts of significant inflation have all been broad-based. If “cheap money” was working, these would all be really moving.
What’s really going on is much simpler, and it’s the same as has been going on since 2007. The media, driven by economists, is making more out of what is relative improvement than is warranted. In other words, 2015-16 was bad; in many places around the world 2008 bad. Last year, 2017, wasn’t as bad. Minus signs disappeared over that interim.
Market prices understand the difference. Even though inflation expectations have risen since the middle of last year, that’s not the same as rising inflation expectations. TIPS yields and breakevens still register expectations for persistently low and undershooting inflation. What’s changed is that these markets now price less of an undershoot than they did two years ago.
In other words, what changed in markets was an outlook that was less bad, not one that became good. Throughout 2017, economic statistics including those for published inflation rates (again, US as well as Europe) confirmed that view month after month. Economists and the media were confused; markets understood the big difference.
As worrisome as all that is, there are quite a few indications that last year was the bestwe might see in terms of this upturn mini cycle. Not only have the Chinese reported concerning economic results lately, there are widespread indicators flashing another second derivative change. That doesn’t mean recession is ahead, though it’s not ruled out, but it does suggest that lackluster, low-level growth is proving yet again the ceilingfor the upside.
In fact, the growth rate of ECRI’s international long leading index — which, a year ago, correctly proclaimed the “brightest global growth outlook since 2010” — has turned down, delivering a clear message. Cyclical forces are in no position to sustain the synchronized global growth upturn that has gone on for more than a year.
It’s a disappointment all-too-consistent with non-excitable views on inflation. The story of the PCE Deflator last year is one conspicuously devoid of momentum. As noted earlier today, in the very same Personal Income and Spending report from the BEA it took a collapse in the savings rate just to keep the US economy in low-level positive GDP. The reason for a decade low in savings is the dramatic, and persistent, slowdown in the labor market.
If there is a basis for “tempering fears of popular discontent”, I just don’t see it. I see, in fact, quite the opposite. Unlike inflation rates, the rhetoric heats up but the global economy never does. People are tired of being told how things are getting better when they aren’t; especially when the case for the positive is never reasonably supported. It’s all based entirely on what the economy “will do” when over the last ten years it never did.
Something substantial and meaningful will have to change to make the outcome different this time. The absence of minus signs while nice isn’t nearly as significant as it is made out to be.
The US dollar is having one of its best days in three months. It is coinciding with the push in 10-year yields above 2.70% and the two-year yield at its highest level since 2008 (~2.13%). It may have been encouraged by a push back against the ECB hawks who want to end QE as soon as possible and preannounce an end date.
The doves suggest that there continues to be a consensus for tapering of the current purchases after September. This can still change, of course, but the idea is that there will not be an abrupt end in September. Because of the sequencing, which Draghi reconfirmed and underscored, the longer the purchases, the further off the rate hike.
We argue that the market has exaggerated the timing of peak divergence. It is still at least a year away. The market feels more confident that the Fed will be raising interest rates this year starting in March. By the time the ECB will raise its negative 40 bp to negative 30 bp or negative 20 bp, the Federal Reserve will have raised interest rates by between 50 bp conservatively and 100 bp by their own estimation. The Fed’s balance sheet will shrink by roughly $420 bln this year, while the ECB’s will expand by at least 270 bln euros and the BOJ’s by around JPY40 trillion.
Rate differentials were not the driver last year, but that does mean that they should be disregarded. We recognize that there is not a linear relationship between interest rates and exchange rates, but see the continued widening of the differential rate differentials, mostly due to an increase in real interest rates, though term premium is also rising. We think the market has been too quick to discount the constructive US policy mix and too quick to anticipate the changes in BOJ and ECB policy.
Market positioning and sentiment seems extreme, but today’s bounce does not appear to be sufficient to break the bears. We see today’s price action as a retracement of the last leg down that began January 17-18. Key support for the euro and sterling held (~$1.23 and $1.3980 respectively). The critical level for dollar-yen is near JPY110.25, but it could not even resurface the closer hurdle near JPY109.50.
Hence, the dollar is poised to pull back in a classic Turn Around Tuesday. The magnitude of the retreat and the shape of it will help determine whether this is the start of a more sustained recovery of the dollar. The economic data focus turns to Japanese employment and household spending (including retail sales), and the first look at Q4 EMU GDP. Tomorrow night Trump speaks ahead of Wednesday’s FOMC meeting, where a hawkish hold is the most likely outcome.
Japan’s labor market is tight. Pressure has been alleviated by women, elderly, and foreign workers but there are limits on this course. Consumption appears to be on the rise as the expansion broadens. In December 2016, overall house spending fell 0.2% year-over-year. The November 2017 increase of 1.8% likely overstates the case, and it may pull back a bit in December.
The recovery in the eurozone strengthened and broadened in 2017. The PMIs and monthly data suggest another strong quarter was recorded. The median forecast is for a 0.6% increase that matches Q3. The risk is on the upside.
A hawkish hold Wednesday by the FOMC is the most likely outcome
The US Treasury will announce the details of the quarterly refunding Wednesday
The US non-farm payrolls Friday are likely to bounce back from the weather-induced weakness in December
There are two eurozone economic reports that will draw attention: GDP and CPI
Japan reports economic data almost every day this week
The dollar is broadly firmer against the majors as the new week begins. Aussie and yen are outperforming, while sterling and Swissie are underperforming.
SNB declined to comment on market chatter of possible FX intervention. EM currencies are broadly softer. RON and CNY are outperforming, while ZAR and TRY are underperforming.
MSCI Asia Pacific was flat, with the Nikkei flat as well.
MSCI EM is down 0.2% on the day, with the Shanghai Composite falling 1%.
Euro Stoxx 600 is down 0.2% near midday, while S&P futures are pointing to a lower open.
The 10-year US yield is up 6 bp at 2.72% ahead of the US Treasury’s quarterly refunding announcement Wednesday.
Commodity prices are mixed, with Brent oil down 0.7%, copper up 0.7%, and gold down 0.2%.
Many investors are confused, and the official communication only fanned the confusion. Before turning to next week’s key events and data, let’s first spend some time, working through some of the confusion.
There was no change in policy last week. The US did not suddenly become protectionist. It did put tariffs on solar panels and washing machines. At the end of last week, the US International Trade Commission unexpectedly ruled against Boeing’s claims against Canada’s Bombardier.
All US presidents in the modern era have fought against what it argues are other countries taking unfair trade advantage, and have levied tariffs on some products. Even the great free trade advocate Ronald Reagan used “voluntary export restrictions” and “orderly market agreements” to protect the American producers. Note too that the US wins most of the cases it brings to the WTO.
The tarriffs on solar panels and washing machines were narrowly based. They will be challenged at the WTO, where its largest trading partner Canada has also challenged the longstanding practice of the US. There will likely be additional measures announced over the coming few months on steel, aluminum, and intellectual property. The best course for US trading partners is not to enter into a tit-for-tat trade war, but to use the international conflict resolution mechanisms that the US helped create in the first place.
The US did not abandon the “strong dollar policy” or begin a currency war. Not only did Mnuchin clarify his comments, but President Trump gave as near a full-throated endorsement of the strong dollar policy as imaginable. While Mnuchin’s remarks fueled criticism from other G7 officials, they did not retaliate by trying to talk down their own currencies. The much talked about “currency war” has not begun.
It seems rather obtuse that more than two decades after Rubin first enunciated the strong dollar policy that some economists still try to link the policy to a certain exchange rate. These economists go on then to debate which interest groups, industries, and social classes are helped by a stronger exchange rate and which are hurt. This reflects a profound and dangerous misunderstanding.
The strong dollar policy was not about exchange rates, as paradoxically as that may sound. It was about the de-weaponization of the foreign exchange market. Recall that prior to 1995, the foreign exchange market was indeed an arena of rivalry between leading capitalist countries. After the collapse of Bretton Woods in 1971, there was a reluctance to simply let the market determine exchange rates. The 1985-1987 period was the heyday of G7 coordination in the foreign exchange market. And, even as late as 1995, US policymakers from time-to-time would threaten to depreciate the dollar.
Rubin represented a break from this tradition. The strong dollar policy was the beginning of the de-weaponization of the foreign exchange market. In that little phrase, the US signaled it would no longer use the dollar to elicit policy concessions or reduce its debt burden. Mnuchin did not suggest otherwise. Now the G7 and the G20 have endorsed this principle, which briefly stated is that foreign exchange rates ought to be set by the market.
However, many investors are indeed concerned that the US is defecting from the evolving international order that Trump’s predecessors were instrumental in building. The “America First” espoused by the President plays into precisely these fears, and its origin was shortly after the US Congress rejected Wilson’s League of Nations proposal. It is not clear how these fears will be alleviated before the next presidential election in 2020, but a shift in control of the legislative branch in November could help convince others of the resiliency we have identified. Trump’s so-called disruptions could be limited to tactical changes rather than a strategic reversal of the thrust of US policy since the end of WWII.
The ECB did not change its policy one iota. Asset purchases at the rate of EUR30 bln a month will continue at least through September, and the link to the development of price pressures was maintained. The hawks, who advocate setting a terminal date for the purchases, do not represent a majority. Growth is strong, and price pressures still need the extraordinary monetary support, which extends beyond the asset purchases.
Draghi sounded as optimistic as ever about the economy. Given the euro’s appreciation since the December ECB meeting and the questions from the reporters, there was no doubt that Draghi would address it. He did not push back as hard as some would have expected about the euro’s strength, which he attributed to the strength of the regional economy and to Mnuchin’s comments (without citing Mnuchin by name). Given the magnitude of the euro’s rise before Mnuchin’s comments, it would seem Draghi was putting more weight on the former (macroeconomic considerations) than the latter (comments that appeared to violate the rules of engagement).
Likewise, at Davos, BOJ Governor Kuroda did not announce a shift in Japan’s monetary policy. What drew a sharp market reaction was Kuroda’s comment that it was finally getting close to its inflation target and that wages were beginning to rise. The BOJ targets core CPI, which excludes fresh food, at 2%. Several hours before Kuroda spoke, Japan reported that the December core CPI rose 0.9%, the same as in November. In December 2016, it stood at minus 0.2%.
Kuroda suggested wages might have begun rising in Japan. This could be true, but the aggregate data on labor cash earnings does not show it. The 2017 year’s average year-over-year rate is 0.4%. The 2016 average was 0.5%. In 2015, the average was 0.2%. There does seem to be something happening though. Hourly cash earnings of non-regular workers have accelerated while regular workers continue to experience weaker earnings growth.
Kuroda was explaining to an international audience that its Qualitative and Quantitative Easing and Yield Curve Control strategies were yielding desirable results. He indicated a few days earlier in favor of patience and perseverance. Just as it is showing results is not the time to abandon the course. Nothing Kuroda said suggests that investors should change their views on the trajectory of BOJ policy.
Thus far, Japanese bond yields have withstood the rise in other G7 countries yields. For example, over the past three months, as US and German 10-year yields have risen by roughly 25 bp, the yield on the 10-year JGB has risen 0.3 bp. At the short-end of the coupon curve, Japan’s yields are even more resilient. The US two-year yield has risen 53 bp over the past three months and the German yield is up 21 bp. The two-year JGB yield is up almost three basis points.
Markets may be like a radio. Sometimes there is noise. Sometimes there is a signal-music. Reasonable people may differ what is the signal or music and what is noise. The idea that the US, the ECB, or Japan announced a change in policy last week strikes us as noise and more a function of investor psychology and angst, and uncertainty surrounding the timing of ECB and BOJ exits in the face of among the most robust economic expansions in more than a decade. Market positioning and sentiment seems extremely dollar negative, though according to the OECD’s PPP models, most major currencies are overvalued against the dollar, except the yen (~8.3% undervalued) and euro (~6.9% undervalued). Sterling is nearly fairly valued (~-0.65% undervalued).
In addition to the US jobs data at the end of the week, there are two other events that are important for investors, without discussing Trump’s first State of the Union Address. In fact, Trump will deliver the State of the Union Address a few hours after Yellen chairs her last FOMC meeting. The market understands that there is practically no chance of a rate hike.
However, a hawkish hold is the most likely outcome Wednesday. Growth impulses are stronger, even though Q4 GDP disappointed. The part of the economy that is the most responsive to monetary policy, final domestic purchases rose by a robust 4.8%. Inflation and market-based measures of inflation expectation have risen. In the first look at Q4 GDP, the core PCE deflator rose from 1.3% to 1.9%. The 10-year breakeven rate (the difference between the yield of the conventional 10-year note and the 10-year TIPS) has risen by about 20 bp since the December FOMC meeting and at nearly 2.10%, where it finished last week. It is at three-year highs.
The US Treasury will announce the details of the quarterly refunding Wednesday. This is important because investors have already been put on notice that the size of the coupon offerings will increase. Many participants still do not appear to appreciate that the government’s net issuance this year will be around twice last year’s $550 bln. Around a third or so will be T-bills, but this cannot happen until the debt ceiling is resolved. Coupon issuance is going to rise as the Federal Reserve increasingly withdraws from buying (at a rate of $60 bln in Q1 18, $90 bln in Q2, $120 bln in Q3, reaching a terminal velocity of $150 bln in Q4 18).
The US non-farm payrolls are likely to bounce back from the weather-induced weakness in December. The median estimate is around 180k after December 148k increase. The US averaged 171k net new jobs a month last year, down from 187k average in 2016 and 226k in 2015. The point is that US jobs growth is doing fine, but it is well past the cyclical peak. Auto sales, which will be reported also seem to be past their cyclical peak, but were re-energized last year replacements are devastating storms
The focus has turned to average hourly earnings growth. Currently, it is seen in the context of the outlook for core inflation, but it is also an important driver or income and consumption. Average hourly earnings have risen at an average monthly pace of 0.2% in every year since 2010. The average for the last three months of 2017 slipped to a 0.1% pace. However, average hourly earnings rose 0.3% in December and are forecast to have matched that in January. The year-over-year pace slowed to 2.5% in December 2017 compared with 2.9% in December 2016. A 0.3% increase in December will lift the pace to 2.6%.
There are two eurozone economic reports that will draw attention. First, following the UK and US, the first estimate of Q4 GDP will be reported Tuesday. The median in the Bloomberg survey looks for a 0.6% pace, the same as in Q3. The risk lies to the upside, given what appears to have been a broadening of the expansion.
Second, and more important for monetary policy is the preliminary estimate of January CPI Wednesday. Most economists are looking for the headline rate to slip to 1.3% from 1.4%, while the core rate ticks up to 1.0% from 0.9%. The change is in the opposite direction of what one would expect if the price of oil increase was not fully offset by the euro’s appreciation. Given market positioning and sentiment, disappointment with a core rate miss may spur a greater market reaction than an upside surprise on the headline rate.
Lastly, Japan reports economic data almost every day this week. These include jobs, household spending, retail sales, industrial production, auto production and sales, manufacturing PMI, construction orders, and housing starts. The key takeaway is that the Japanese economy is continuing its expansion. It is, for the time being, a virtuous cycle of stronger exports spurring capex and output, which boosts the demand for labor, and now consumption. A homegrown threat on the horizon is the sales tax increase planned for October 2019.
EM FX continues to gain in the current weak dollar environment. EM data this week are largely expected to show continued growth, reflecting the strong global growth backdrop currently in place.
10-year note: Currently net short 117.9k, up 28.6k.(Futures Only).
Tuesday, a two-day FOMC meeting begins. This is the year’s first, and will be Janet Yellen’s, the outgoing chair, last. (The FOMC meets eight times a year.)
The next one is on March 20-21, and this one comes with a press conference by the chair. Jerome Powell is replacing Ms. Yellen.
In the futures market, the likelihood of a hike next week is almost non-existent. In all probability, there is not going to be much change in the language as well. The dot plot expects three hikes this year.
More interesting will be the March meeting. Futures have priced in 77-percent odds of a 25-basis-point rise in that meeting. Importantly, would the Powell-led FOMC continue the status quo or chart a different path – regardless hawkish or dovish? Markets currently expect only two hikes this year.
10-year note: Currently net short 145.1k.
30-year bond: Currently net long 55.7k, down 11.4k.(Futures Only).
Major economic releases next week are as follows.
Personal income for December is due out Monday. In the 12 months to November, core PCE rose 1.48 percent. This is the Fed’s favorite measure of consumer inflation, and has remained sub-two percent since May 2012.
Tuesday, the S&P Corelogic Case-Shiller home price index for November comes out. Nationally, home prices in October rose 6.2 percent year-over-year. This was the highest growth rate since June 2014. Prices have risen every month since May 2012.
Wednesday brings the employment cost index (4Q17) and the pending home sales index (December).
Compensation costs for private-industry workers increased 2.5 percent in the 12 months to September last year. While still subdued, this was the fastest growth in 10 quarters.
Pending home sales in November inched up two-tenths of a point month-over-month to 109.5. The cycle high 113.6 was reached in April 2016.
Labor productivity (4Q17, preliminary) and the ISM manufacturing index (January) are due out Thursday.
Non-farm output per hour increased 1.46 percent y/y in 3Q17. This was the highest growth rate in nine quarters. Productivity remains subdued.
Manufacturing activity rose 1.5 points m/m in December to 59.7, not too far away from September’s 60.8, which was the highest since May 2004.
Employment (January), the University of Michigan’s consumer sentiment (January, final), and durable goods (December, revised) are scheduled for Friday.
The economy only added 148,000 non-farm jobs in December. In all of 2017, the monthly average was 171,000, versus 187,000 in 2016, 226,000 in 2015 and 250,000 in 2014.
Preliminarily, consumer sentiment fell 1.5 points m/m in January to 94.4. October’s 100.7 was the highest since January 2004.
December orders for non-defense capital goods ex-aircraft – proxy for business capital expenditures – rose 8.4 percent y/y to $67.1 billion (SAAR). They fell 0.3 percent m/m. Orders peaked in September 2014 at $70.3 billion and have risen since bottoming in May 2016 at $59.9 billion.
30-year bond:Currently net long 103.4k.
Crude oil: Currently net long 781.5k, down 5k.(Futures Only).
Spot West Texas Intermediate crude ($66.14/barrel) continued higher, before drawing sellers after hitting $66.66, leaving behind a long wick.
The bears have work to do, however. Nearest support lies at $65, which was defended Friday, then $62, and after that $59.
The EIA report for the week of January 19 showed that U.S. crude production increased 128,000 barrels per day to 9.89 million b/d – a new record.
Crude imports rose as well – by 91,000 b/d to eight mb/d. This was a 13-week high.
Refinery utilization fell 2.1 percentage points to 90.9 percent. The 96.7-percent reading three weeks ago was the highest since August 2005.
Gasoline and distillate stocks rose 3.1 million barrels to 244 million barrels and 639,000 barrels to 139.8 million barrels, respectively.
Crude stocks, however, dropped 1.1 million barrels to 411.6 million barrels – the lowest since February 2015.
Crude oil: Currently net long 75.1k.
E-mini S&P 500: Currently net long 166.5k, up 44k.(Futures Only).
The crowd is jumping on board.
In the week through Wednesday, U.S.-based equity funds (including ETFs) took in $23.4 billion. This followed inflows of $36.8 billion in the prior four (courtesy of Lipper).
In the same week, $13.7 billion went into SPY (SPDR S&P 500 ETF), while VOO (Vanguard S&P 500 ETF) attracted $657 million. IVV (iShares core S&P 500 ETF), however, lost $126 million (courtesy of ETF.com).
Late to the party? Time will tell. This much we know. The S&P 500 (cash) has rallied 19 percent in the past five months, and 7.5 percent this year alone. These are heady numbers. We could very well be witnessing events before a blow-off top.
That said, momentum – as overbought as it is – is intact. The index Monday enjoyed a mini breakout – out of 2800 – followed by another on Friday out of 2845.
E-mini S&P 500: Currently net long 187.7k.
Euro: Currently net long 144.7k, up 5.2k.(Futures Only).
Last July, the cash ($124.27) broke out of a nearly 10-point range. A measured-move target extends to 124-125. Similarly, a trend line drawn from the all-time high of $160.20 in April 2008 draws to 125.
At one point Thursday, the euro was up as much as 1.1 percent, but only to reverse hard after hitting 125.37 to end the session down 0.1 percent.
Also Thursday, Mario Draghi, ECB president, talked about the potential impact of the stronger euro on inflation, suggesting it may end up prolonging the need for stimulus.
In all probability, this kind of verbal intervention will continue. Plus, there is that afore-mentioned resistance for the bulls to deal with.
Non-commercials are already the most net long ever.
Euro: Currently net long 143.09k.
Gold: Currently net long 214.7k, up 3k.(Futures Only)
Intraday, the cash ($1,352.10) broke out of a slightly falling trend line from August 2013, but closed out the week right on it. A convincing breakout would be a significant development.
GLD (SPDR gold ETF) was already beginning to attract funds ahead of this, having taken in $760 million on Thursday and Friday last week. In the week through this Wednesday, $874 million moved into the ETF, and IAU (iShares gold trust) took in another $181 million (courtesy of ETF.com).
Also, during the January 1-12 period, GLD short interest shot up 97.3 percent to a four-month high. The metal’s advance this week probably squeezed these shorts.
Where gold trades currently is worth watching also because $1,360s also makes up the neckline of a four-and-a-half-year-old reverse-head-and-shoulders formation – potentially very bullish should a breakout occur.
Gold: Currently net 389.5k.
Nasdaq 100 index (mini): Currently net long 15k, down 10.4k.(Futures Only).
In the week through Wednesday, QQQ (PowerShares QQQ ETF) gained $1.2 billion (courtesy of ETF.com).
Friday, the cash rose to a new all-time high of 7022.97. It is possible shorts gave up some more.
During the January 1-12 period, short interest on XLK (SPDR technology sector ETF) dropped 13.1 percent to a one-year low. On SMH (VanEck Vectors Semiconductor ETF), it fell 15.1 percent to a seven-month low. QQQ’s (PowerShares QQQ ETF), however, rose 11 percent to a four-month high.
Nasdaq 100 index (mini): Currently net long 16.7k.
Russell 2000 mini-index: Currently net long 36.7k, down 5.2k.(Futures Only).
Flows continued into small-caps. In the week to Wednesday, $791 million moved into IWM (iShares Russell 2000 ETF), and IJR (iShares core S&P small-cap ETF) took in $52 million. This was preceded by inflows of $305 million and $87 million in the prior week, in that order (courtesy of ETF.com).
Nonetheless, small-caps continue to lag their large-cap peers. The week produced a candle with a little bit of a wick. The bears would love to make something out of it, but have persistently been denied an opportunity since particularly the most recent advance began mid-November last year.
Russell 2000 mini-index: Currenly net short 99 contracts.
US Dollar Index: Currently net short 4.2k, up 2.9k.(Futures Only).
Treasury Secretary Steven Mnuchin versus President Trump. Wednesday in Davos, the former said a weak dollar would be good for U.S. trade. A day later, the latter said he ultimately would want the greenback to be strong. Predictably, the dollar seesawed.
Having just lost nearly two-decade support at 92-93, the US dollar index lost one percent on Wednesday, only to inch up 0.2 percent in the following session. Mr. Trump’s comments seem to have soothed traders’ nerves Thursday, as the cash (88.89) reversed hard from the intraday low of 88.25.
Support/resistance at 89 goes back to early 2004. Thursday’s low also tested a rising trend line from May 2011 – so far successfully. This could prove to be an important test.
US Dollar Index: Currently net short 4.1k.
VIX: Currently net short 90.2k, up 8k.(Futures Only).
Volatility bulls managed to defend the 200-day on the cash (11.08) – now above that average for nine sessions. The daily chart is itching to go lower, so next week will be another test.
Be that as it may, VIX has held up better the past couple of weeks, even as the S&P 500 rallied 3.1 percent.
It seems longs are buying protection.
This is taking place even as equity calls are in heavy demand. The 21-day moving average of the CBOE equity put-to-call ratio Friday dropped to .543 – matching the low on July 17, 2014. Equity bears will have a feast when – not if – unwinding begins.