Last updated: May 3rd, 2017 at 09:58 pm
- Central bank monetary policy is dominating markets again. Following the easier rhetoric from the ECB last week and the rate cuts from the PBoC, the dollar has strengthened across the board. The FOMC will not hike but it will be the Fed statement that will be the key driver of markets, along with a raft of key tier one economic data this week. The easier policy of rival central banks decreases the need for a rate hike, but it will be interesting to see how the Fed’s statement reads with regards to the “global economic and financial developments”. Market sentiment is far more settled and the PBoC has cut interest rates for a 6th time. Quite how the Fed re-words this will be interesting.
- The Fed will not hike rates this week, and the chances of the Fed hiking in December are also low (Fed Funds futures are pricing in a 32% probability currently). The market is not pricing in a “probable” Fed rate hike (i.e. over 50% chance) until the March meeting. This would mean that my long held expectation of December is looking increasingly tenuous.
- The release of tier one economic data could be a significant determining factor of the chances of a December hike in the next couple of weeks. As you will see from the list below, there is a huge amount of key data, including GDP growth, core PCE (the Fed’s preferred inflation measure), the PMIs and of course the Employment Situation report (i.e. Non-farm Payrolls and Average Hourly Earnings). If these numbers continue to underwhelm then this would all but certainly push back expectations of a hike into 2016. This means that there is likely to be a lot of dollar based volatility over the coming days as this data is released (remember the Fed constantly reminds us how “data dependent” it is).
- The dollar has been driven higher in the wake of the ECB and PBoC, and I read about the return of “currency wars”. With the Bank of Japan set to announce policy on Friday is it going to follow suit? Recent rhetoric from Governor Kuroda would suggest that the BoJ was comfortable, however Japan is now in deflation once more and there could be a desire to combat this through further easing. The big question for the BoJ is how effective this would be seeing as the BoJ already owns around half the supply of Japanese Government Bonds. It will be an interesting decision.
- Dollar strength is also driving commodity prices lower. In the past week the gold price and oil have slid back. Although gold seems to be looking to form new support, the oil price on WTI has broken to an 8 week low. This move has considerable implications for general market sentiment, in addition to a sharp weakening on the Canadian dollar.
- US Q3 earnings season is progressing reasonably well. The general theme is that more companies are beating earnings estimates (c. 77%) but less companies are beating on the revenue line (c. 43%) compared to the 5 year average (according to FactSet). This would reflect the suggestion that the US economic recovery is slowing down. Current estimates suggest that S&P 500 revenues are set to decline for a fourth consecutive quarter in Q4.
- So the big economic data point is clearly the Fed statement, but on Thursday there will be considerable attention given to the first reading (Advance) of US Q3 GDP, which is expected to fall well back from last quarter’s +3.9% to just +1.6%. From my reading of the large swathes of economic data it would seem as though the bulk of them are slowing down for the US (just looking across the regional Fed surveys which have turned negative would suggest the economy is stuttering). Also take not of the Personal Consumption Expenditure on Friday which would certainly need to pick up from the +1.3% core data to justify any rate hike.
- Watch for: FOMC statement, US Q3 GDP, core PCE
EUR/USD – The old pivot band $1.1050/$1.1100 could now be seen as a chance to sell
- The ECB has reacted and it appears as though whilst they are not explicitly chasing policy to drive down the value of the euro, the governing council is mindful of the effect. Extending QE in December now becomes highly likely (perhaps even with a cut to the deposit rate too). The Fed statement is a key driver this week and the Eurozone flash CPI will also be interesting given the dip back into deflation last month.
- The sharp dollar strength now re-opens the bottom of the trading band at $1.0810. The pivot band $1.1050/$1.1100 which had once been supportive is now a basis of resistance. Momentum is corrective and is now looks as though rallies are being used as a chance to sell.
- Watch for: FOMC statement, US Q3 GDP, Eurozone flash CPI, core PCE
GBP/USD – Holding above $1.5200 is key to preventing a retest of the range lows
- The dollar has been the driver of this pair in recent sessions. The UK data has been mixed (Retail Sales strong, GDP slightly weaker), but the general dollar strength has been a drag on the pair lower. The Fed meeting, US GDP and PCE are clearly event risks this week to drive volatility.
- The slide back towards $1.5200 support if the key higher reaction low continues. This is a key level as it protects the big range lows around $1.5100. The falling Stochastics are a concern however the support at $1.5200 remains intact for now.
- Watch for: FOMC statement, US Q3 GDP, core PCE
USD/JPY – Continue to play the 118/121.70 range with the pivot around 119.60
- Both central banks announce this week whilst there is also inflation for both too, so there is a lot of potential volatility (especially if the Bank of Japan further follows the PBoC and eases further).
- The range 118/121.70 continues and the two day correction off 121.50 resistance means the near term support at 120/120.20 is under threat. However the main pivot level is at 119.60 and this is a key point within the trading band which reflects a bullish bias whilst above it.
- Watch for: FOMC statement, US Q3 GDP, Japanese CPI, BoJ monetary policy, core PCE
Gold – Still looking for a higher low $1156/$1170
- The stronger dollar has been a drag on gold and pulled the price back by over $30 from the peak two weeks ago. The expectations over the Fed holding off on monetary easing would be strong for gold. With regards to the BoJ though there is a tug-of-war over the impact of further easing (which should be gold supportive) and a stronger dollar (which is negative for gold).
- However the support band around $1156/$1170 remains intact and the selling pressure has certainly slowed. Is this close to another higher low and a buying opportunity?
- Watch for: FOMC statement, US Q3 GDP, BoJ monetary policy, core PCE
Indices – The oil price falling away is negative for equities sentiment, but watch for the Fed and BoJ
- S&P 500 – The easier monetary policy from the ECB and PBoC is helpful for indices and the big outperforming S&P 500 is at the forefront of the recovering indices. The falling oil price is a fly in the ointment though and this could weigh on sentiment. The support band is now 2020/2040.
- DAX Xetra – The DAX is just looking to correct a near term overbought position and also to fill a gap from the breakout just above 10,500. However easing from the ECB is certainly supportive and should help the DAX to outperform FTSE 100 on a rally.
- FTSE 100 – The oil price decline is a drag on the FTSE 100 which remains unremarkable in its recovery. The support around 6285 needs to hold.
WATCH OUT FOR THIS WEEK
Wednesday 28th October
- Australia – CPI
- US – Goods Trade Balance
- US Crude Oil Inventories
- US – FOMC monetary policy
- New Zealand – RBNZ monetary policy
Thursday 29th October
- US – Q3 GDP (Advance)
- US – Pending Home Sales
Friday 30th October
- Japan – CPI
- Japan – BoJ Monetary Policy
- Eurozone – CPI (flash)
- Canada – GDP (monthly)
- US – Employment Cost Index
- US – Personal Consumption Expenditure
- US – University of Michigan Sentiment (revised)
Sunday 1st November
- China – Manufacturing PMI (official)
Monday 2nd November
- China – Manufacturing PMI (Caixin)
- China – Retail Sales
- Eurozone – Manufacturing PMI
- UK – Manufacturing PMI
- US – ISM Manufacturing PMI
Tuesday 3rd November
- Australia – RBA monetary policy
- UK – Construction PMI
- US – Factory Orders
- New Zealand – Unemployment
Wednesday 4th November
- China – Services PMI (Caixin)
- UK – Services PMI
- US – ADP Employment Report
- US – Trade Balance
- US – ISM Non-manufacturing
- US Crude Oil Inventories
Thursday 5th November
- UK – Bank of England Monetary Policy and Quarterly Inflation Report
- US – Weekly Jobless Claims
Friday 6th November
- UK – Manufacturing Production
- UK – Trade Balance
- US – Non-farm Payrolls
- US – Unemployment & Average Hourly Earnings