Previous week: 08 May 2017 – 12 May 2017
US Crude oil inventories—10.30pm 10 May 2017 Wednesday
US crude inventories dropped -5.789 million barrels on the expectation of -2 million drop. Baker Hughes US oil rig count rose another 9 from 703 to 712.
Reserve Bank of New Zealand official cash rate + rate statement + press conference—5am 11 May 2017 Thursday
In line with expectations, there was no change (+1.75%) in interest rate in New Zealand.
Bank of England Inflation Report + Monetary Policy summary + Official bank rate—7pm 11 May 2017 Thursday
In line with expectations, there was no change in monetary policy in United Kingdom.
US CPI—Friday 12 May 2017 8.30pm
US headline CPI m/m for April came in at +0.2%, lower than consensus expectation of +0.3%. March’s headline CPI was -0.3%. US core CPI m/m for April came in at +0.1%, lower than consensus expectation of +0.2%. March’s core CPI was -0.1%. Core CPI at +1.9% is now under +2% Fed’s target. This may make the Fed rethink hiking Fed Funds rate by 25 basis points in June. Or will the “data-dependent” Fed hide its head in the sand and pretend that this data point is just part of the “transitory” phase?
US Retail Sales—Friday 12 May 2017 8.30pm
April’s headline retail sales m/m rose +0.4% on the expectation of a rise of +0.6%. March’s headline retail sales was revised upwards from -0.2% to +0.1%. April’s core retail sales m/m rose +0.3% on the expectation of a rise of +0.5%. March’s headline retail sales was revised upwards from 0.0% to +0.3%. Decline in retail sales in the month of April may make the Fed rethink hiking Fed Funds rate by 25 basis points in June. Or will the “data-dependent” Fed hide its head in the sand and pretend that this data point is just part of the “transitory” phase as with the CPI data.
Coming week: 15 May 2017 – 19 May 2017
UK CPI y/y—16 May 2017 Tuesday 4.30pm
Expectation for April’s UK CPI is for an increase of +2.6%. UK CPI rose +2.3% in March.
US Crude oil inventories—10.30pm 17 May 2017 Wednesday
Another draw down in crude oil inventories?
Long S&P 500
Despite (or because of) weak CPI and retail sales numbers out on Friday, the bull run in stock market continues. S&P 500 is currently taking support at 2380-2390 zone. Buying at current market price with a stop loss placed under Thursday’s bullish pinbar candlestick would give a good entry to go long the stock index.
Weak CPI and retail sales released on Friday caused the implied probability of a June rate hike to fall from a high of 80% to the current 70%. Similarly, the number of rate hikes in 2017 as implied by the market had recently turned downwards. This drop in rate hike odds will be bullish for the stock market.
USD/CAD has been following a bullish trend line for over two years now. Recently it popped above horizontal resistance at around 1.36 and now coming back down to that level again. Waiting for it to come back down to support and then deciding whether to go long would be wise. Next resistance on the weekly chart is at 1.46.
WTI has recently broken a key technical trend line to the down side. Generally, breaking of supports and resistances occur because of shifts in fundamental posture. US oil production continue to trudge upwards and the rig count increasing unabated. OPEC try as they might had clearly lost the battle against the United States shale producers.
The Fed continues their hawkish rhetoric and tighter monetary policy objectives. The Canadian central bank had been and will continue to be helpless in terms of monetary policy. Oil prices have been depressed and are forecast to be continue to be depressed for some time. Therefore the Bank of Canada cannot raise interest rates because the Canadian economy is highly dependent on the exportation of crude oil. The Bank of Canada can only keep interest at rock bottom +0.5% or lower it further. A divergence in monetary policy is seen between America and Canada.
A small point to add is the willingness of President Trump to pull out of the North American Free Trade Agreement (NAFTA). NAFTA is a free trade agreement between three countries; USA, Mexico, and Canada. At the moment, Trump had decided that he will not pull USA out of NAFTA. Instead, he indicated that he is open to renegotiating the terms of the agreement. USA pulling out of NAFTA will be more detrimental to the other two nations than USA because of the relative size of their economy.
EUR/USD long? (speculative)
When studying the chart of EUR/USD, it is observed that it had been trading within a range between 1.04 and 1.14. The last weekly candlestick (pink arrow) shows a bullish pinbar at 1.0850 support. When taking a closer look on the daily chart, an uptrend in EUR/USD is seen (pink lines). This uptrend is evident from EUR/USD forming higher highs and higher lows since December 2016. Additionally, 1.0850 had acted as support and resistance in the past, and it seem that this level acted as support this time around (pink arrow). Buying at a price close to 1.0850 support would give a good entry for a long EUR/USD that targets the upper end of the range at 1.14.
Drop in rate hike probability by the Fed implies potential weakening of the US Dollar. Weak CPI and retail sales released on Friday caused the implied probability of a June rate hike to fall from a high of 80% to the current 70%. Similarly, the number of rate hikes in 2017 as implied by the market had recently turned downwards. This drop in rate hike odds will be bullish for the stock market.
I am also of the opinion that the European economy is improving. The EU headline inflation rate (y/y) has been tracking upwards almost every month ever since it made a low of -0.2% in April 2016. It is currently at 1.9% (April 2017). Unemployment rate in the European Union made a high of 11% in March 2013 and had been steadily decreasing ever since. Unemployment rate currently stands at 8.0% (March 2017).
A point to note is that EU CORE inflation (that excludes energy and food) had generally not followed the trend of headline (total) inflation. However in April 2017, EU core inflation finally rotated upwards, in line with the trend seen in headline inflation. EU core inflation currently stands at 1.2% (April 2017).
Given the fact that EU headline inflation rate is currently at 1.9% and that the ECB’s mandate is to keep inflation close to but under 2%, is it not the right timing to start tightening monetary policy to maintain their price stability mandate? With steady improvements made in price stability and labour market, would not it be the right timing to start tightening monetary policy?
Food for Thought
“The Big Picture” by Ray Dalio, Chairman and CIO of Bridgewater Associates. A great article by Ray Dalio. Every word is a gem. He articulates his ideas succinctly and clearly. I recommend that you read it to the very end.