Could U.S GDP Give a Final Boost? With stocks hovering around “no man’s” land, will U.S GDP give a final boost before xmas? Quiet Over Xmas…Most traders ‘will be spending this week with their families and on top of that we don’t have any major data announcements, so it should be relatively quiet. So Much For Santa…Stocks are priced near the top end of what we would traditionally call their value range, so it’s going to take something special to push them higher.Fed Hikes, Stocks Rally…Divergence is still going on and will be a key theme in 2016. Judgement Day…The big question today will not be whether the Fed hikes or not, but instead where the Fed is expected to be this time next year.
Could U.S GDP Give a Final Boost?
22.12.2015 With stocks hovering around “no man’s” land, will U.S GDP give a final boost before xmas? After last weeks big event, which actually saw the stock markets rally briefly, stocks have started retracing, and doing what is actually expected from a rate hike. The S&P 500 is trading within a very supportive zone between the key 2000 handle and 2020, while most other global stock markets are following suit; simply rotating back and forth, not knowing where to go. The Final U.S GDP figures could give a final year end boost to both the markets and the dollar if it can beat expectations. Many analysts are expecting it to come out below last month’s 2.1% figure, forecasting just 1.9%, due to a number of reasons; Credit Suisse backed their view up with the following: “Since Q3 GDP’s first revision, we have seen further downward revisions to manufacturing and wholesale inventories. The latest data on Q3 durable goods shipments also are looking weaker. And newly-released “hard data” on service spending suggest a downward revision to personal consumption on health care last quarter.” I think we may get a little surprise on this one, as the U.S has been performing fairly well all year. Although earnings weren’t spectacular, I think we could see a good year end figure. Next year is a different story however. If the ISM Manufacturing Index doesn’t pick up and stay above 50, we’ll more than likely get a healthy but substantial drop off at some point during 2016.
Quiet Over Xmas
21.12.2015 Of course the big event last week was the Fed interest rate hike. On Wednesday at 1900 (GMT) the Federal Reserve lifted their overnight interest rate from 0.25% to 0.5%. Following this Yellen held a Press Conference and was fairly dovish. Over the next few days the dollar strengthened and now we’re trading near 1.0850 against the Euro and around 1.4900 against Sterling. Besides from the big interest rate decision last week, we had a fairly quiet week regarding economic data releases. Of course everyone was waiting for the Fed however we did have some inflation data out of the UK and U.S along with some interesting UK Unemployment figures. CPI out of both the UK and U.S was inline, coming in at 0.1% and 0% respectively. The Unemployment figures out of the UK were slightly more interesting. Although overall unemployment fell from 5.3% to 5.2%, the Claimant Count actually went up; analysts expected 0.9k and we got 3.9k.
In addition to that we also saw the Average Earnings Index fall from 3% last month to 2.4% against an expected 2.5%. Sterling has been falling across the board as of late, which is probably a good thing in reality, as it should help improve the exporting aspect of the economy. This week is probably not the best week to trade. Illiquidity is firmly in play and we ‘re getting some “whippy” moves that don’t necessarily make a lot of sense. Most traders ‘will be spending this week with their families and on top of that we don’t have any major data announcements, so it should be relatively quiet; 10-50 pip ranges across the board, most likely. If you do decide to trade, be very careful and trade the most liquid markets. Have a bigger stop than normal and don’t get too angry if you get squeezed out of a lot of trades before they go in your favour. These sort of things happen a lot around this time of year.
So Much For Santa…
18.12.2015 Well, guess I was wrong about that one. Normally, when we get three days like Monday, Tuesday and Wednesday around this time of year we see a continuation with only small pullbacks reflecting profit taking. Yesterday and this morning however have brought us right back down to key support at 2020, which to be honest looks like it could be broken. At this stage a test of 2000 looks again to be on the cards. Personally i think we’ll probably see just more range trading over the next few weeks between 2000 and 2080 however. Moreover, now that the Fed have begun their hiking cycle we should see dollar strength during the first quarter of 2016 and as long as we don’t get any unexpected news from China or other major emerging markets, I don’t see any reason for stocks to drop off in a big way anytime soon. Frustratingly, I think we’ve hit a point in the cycle where we could see a continuation of what we saw throughout 2015. Stocks are priced near the top end of what we would traditionally call their value range, so it’s going to take something special to push them higher. To add to that, as bonds become more attractive, due predominantly to the Fed’s hiking path, stocks are going to find it even harder to get the institutional flow they need to make new highs, leaving a long term range bound market the most likely scenario.
Fed Hikes, Stocks Rally
18.12.2015 Finally we got liftoff. At 7pm yesterday (UK time), the Federal Reserve raised rates for the first time since the Great Recession. They increased their overnight reverse repo rate from 0.25% to 0.5% (the rate at which money centre banks can lend the Fed cash and hold Treasuries overnight). In hindsight I now think Yellen was very smart in the way she dealt with it. By continually pushing it back, she calmed the dollar bull run. The ECB not increasing stimulus as expected then gave the perfect set up for the Fed to liftoff. Not to mention, the recent couple of job reports from the U.S, which dramatically boosted sentiment towards the world’s largest economy.
I’ve included some key quotes from the Press Conference Below: “The committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate.” “The actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.” “Stronger growth or faster inflation will warrant steeper pace of hikes” The market now looks to be on track to receive between 3 and 4 further hikes by the end of 2016. Of course Yellen followed the hike with a fairly dovish statement, reinforcing the data dependent theme. Divergence is still going on and will be a key theme in 2016. Parity is still on the cards ladies and gentlemen!
Judgement Day
18.12.2015 Although yesterday saw some fairly decent data on the economic side of things, it’s today that everyone is waiting for. We some some dollar strength yesterday morning before weakness came back into play; consolidation, as stated previously, was the main force in control. Regarding data, we kicked off with UK CPI, coming out at 0.1% (inline), German Zew (16.1 vs. 15.2), Canadian Manufacturing Sales (-1.1% vs. -0.4%) and of course U.S CPI (0% inline). This morning we had European Flash Manufacturing PMI out of France and Germany (51.6 & 53 respectively) before UK unemployment data (5.2 vs. 5.3 expected). At 1330 (GMT) we then have U.S Building Permits, which is forecast at 1.16m. The major event, which will keep markets at bay, at 1900 (GMT). Following that we have NZ GDP, expected at 0.4% and released at 2145 (GMT).
To be honest, I think this evening’s event will be a bit of a “non-event”. So far almost everyone and anyone is looking at a hike of 0.25% from the Fed. It’s entirely priced in to the market and therefore should have no dramatic effect. There is the likelihood however of some volatility over the press conference that follows. This will give the market an idea of where the Fed stands on future hikes and more importantly their normalisation goal. The big question today will not be whether the Fed hikes or not, but instead where the Fed is expected to be this time next year. Moreover, just as last year’s Santa Rally was kicked off by Yellen, this year could spark something similar. Depending on her comments on the health of the U.S economy, we could see some bullish activity across the market. If she reinforces the idea of U.S strength in the face of the current global economic issues I don’t see why a Santa Rally couldn’t be ignited.
