The Week Ahead – Extreme Greed

The Week Ahead – Extreme Greed

Having competed and lost over the weekend i can’t but help be startled by how similar the behavioral mechanisms behind Jiu Jitsu are trading are. I managed to snatch defeat from the jaws of victory. This was probably the most relaxed and calm i had ever been for a competition. Even more so once my match had begun. I was playing my game and comfortable doing so. Its’ in this state of complacency when disaster struck. As it usually does. Needless to say the loss was a bitter pill to swallow but the lesson was well learnt. I see the same sense of complacency in the current market environment.

Nothing dramatic has changed  since my last briefing, the same sluggish, muddled economy that continues to grind higher that investors seem happy to buy. My view is that the market will continue to melt upwards with the CNN fear & Greed index showing sentiment in the extreme greed zone.

Extreme greed is usually accompanied by extreme complacency.

The impact of tax reform on the economy is living up to expectations and the 20th government shut down in 40 years will have little to no impact on the market.

Previous week: 15 January 2018 – 19 January 2018

UK CPI—16 January 2018 5:30pm Tuesday

UK CPI came in in line with expectations at 3.0% for the month of December. The previous month’s CPI was 3.1%. A fall in CPI (3.1% to 3.0%) towards 2% target would give the Bank of England a little bit more reason not to hike further because they may think that inflation is now under control, and capped at around 3%. For more than half a year since March 2017, CPI had been steady at around 3%. In that time, the British pound has appreciated significantly and is now almost close to pre Brexit levels. Hence, imported inflation from weakened currency would be diminished with strong British Pound. The probability should now lean in favour of inflation decreasing than increasing.

https://tradingeconomics.com/united-kingdom/inflation-cpi

https://www.theguardian.com/business/2018/jan/18/uks-richest-10-spend-more-on-wine-per-week-than-the-poorest-on-water

Bank of Canada rate statement, overnight rate, press conference—17 January 2018 11pm

The Bank of Canada did a rate increase of 0.25% in this meeting, from 1.00% to 1.25%.

Key sentences from Bank of Canada rate statement dated 17th day of January in the year of our Lord 2018

  • Recent data have been strong, inflation is close to target, and the economy is operating roughly at capacity.
  • However, uncertainty surrounding the future of the North American Free Trade Agreement (NAFTA) is clouding the economic outlook. However, as uncertainty about the future of NAFTA is weighing increasingly on the outlook, the Bank has incorporated into its projection additional negative judgement on business investment and trade.
  • In particular, there are signs of increasing momentum in the US economy, which will be boosted further by recent tax changes. The Bank’s outlook takes into account a small benefit to Canada’s economy from stronger US demand arising from recent tax changes.
  • Global commodity prices are higher, although the benefits to Canada are being diluted by wider spreads between benchmark world and Canadian oil prices.
  • In Canada, real GDP growth is expected to slow to 2.2 per cent in 2018 and 1.6 per cent in 2019, following an estimated 3.0 per cent in 2017.
  • Recent data show that labour market slack is being absorbed more quickly than anticipated. Wages have picked up but are rising by less than would be typical in the absence of labour market slack.
  • In this context, inflation is close to 2 per cent and core measures of inflation have edged up, consistent with diminishing slack in the economy. The Bank expects CPI inflation to fluctuate in the months ahead as various temporary factors (including gasoline and electricity prices) unwind. Looking through these temporary factors, inflation is expected to remain close to 2 per cent over the projection horizon.
  • Governing Council will remain cautious in considering future policy adjustments, guided by incoming data in assessing the economy’s sensitivity to interest rates, the evolution of economic capacity, and the dynamics of both wage growth and inflation.

https://www.bankofcanada.ca/wp-content/uploads/2018/01/fad-press-release-2018-01-17.pdf

Charts from Bank of Canada Monetary Policy Report January 2018

It is also worth reading the last two pages of the report which describes the risks to Canada’s inflation outlook, especially with regards to NAFTA (which my hunch tells me that President Trump will rescind)

https://www.bankofcanada.ca/wp-content/uploads/2018/01/mpr-2018-01-17.pdf

US Crude oil inventories—12 am 19 January 2017 Friday

US crude inventories decreased by -6.86 million barrels on the expectation of -3.15 million decrease. This represents 9 straight weeks of drawdowns in crude oil inventories. Baker Hughes US oil rig count decreased by 5 from 752 to 747. Oil production was 9750k barrels per day for week ending 12/01/2018, an increase from 9492k barrels per day in the previous week. Oil production still remains at / near all time high. The rise in rig count seemed to be attributed to the strong correlation to the price of oil. The head on battle between US and OPEC continues. Frackers are churning out their rigs while OPEC is keeping a lid on production.

Image taken from Zerohedge:

https://www.zerohedge.com/news/2018-01-18/wtirbob-jump-after-biggest-cushing-stock-draw-record

https://www.reuters.com/article/usa-rigs-baker-hughes/u-s-oil-drillers-cut-rigs-for-2nd-week-in-three-baker-hughes-idUSL1N1PD1WQ

https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=WCRFPUS2&f=W

Shutdown of the United States government

Noted with thanks. Inconsequential. More political posturing / bickering. Democrats will eventually bend their knee to the Republicans. Trump will get his wall funding. This shutdown will not affect the markets one iota.

http://www.bbc.com/news/world-us-canada-42757091

Venezuela currency surpasses 200k Bolivars per US Dollar

Coming week: 08 January 2018 – 12 January 2018

Bank of Japan monetary policy statement, outlook report, press conference—Tuesday 23 January 2017

NO CHANGE IS EXPECTED. Kuroda is optimistic though. Core CPI at +0.9% is still very far from 2.0% BOJ target.

https://tradingeconomics.com/japan/core-inflation-rate

Despite jumpy market, Bank of Japan watchers don’t expect a policy change anytime soon

https://www.reuters.com/article/us-japan-economy-boj/boj-kurodas-optimism-on-economy-price-outlook-sends-yen-to-4-month-high-idUSKBN1F401Z

US Crude oil inventories—11.30 am 24 January 2018 Wednesday

Another draw in inventories? My hunch tells me that the rebalancing is about to be completed and frackers are going to ramp up production bigly now that USOIL is above $60 a barrel, well in the profitable territory.

ECB minimum bid rate, press conference—8.45am 25 January 2018 Thursday

Dovish posturing is expected. No hints of QE exit.

US Advanced GDP q/q—9.30pm 26 January 2018 Friday

3.0% annualized growth rate for Q4 2017.

Trade Ideas

Long EUR/USD (patience)

Having broken strong resistance at 1.20 – 1.21 decisively, patiently waiting for a retracement back down to support will be wise in getting an entry to go long this pair.

European Central Bank’s Quantitative Easing Programme:

Economists surveyed by Bloomberg are now more hawkish on the pace of removal of Quantitative Easing. This ought to be the case and this shrinks the divergence in monetary policy between the ECB and Fed that had been ongoing for the past years.

https://www.bloomberg.com/news/articles/2018-01-19/ecb-seen-closer-to-signaling-end-to-qe-as-hawks-gain-influence

  • Although the Eurozone’s inflation is not at 2.0% (last 1.4%), it has gone a long way from experiencing deflation in Q1 2016.
  • Although Eurozone’s unemployment rate is still pretty high (last 8.7%), it has gone a long way from the high of 12.1% in Q1 2013 and is still falling at a steady clip.
  • Eurozone’s annual growth rate has stay positive since Q3 2013 and increasing in pace (last 2.6%).

https://www.bloomberg.com/news/articles/2018-01-19/ecb-seen-closer-to-signaling-end-to-qe-as-hawks-gain-influence

https://tradingeconomics.com/euro-area/inflation-cpi

https://tradingeconomics.com/euro-area/unemployment-rate

https://tradingeconomics.com/euro-area/gdp-growth-annual

Long term long position in Gold

  • 57 basis points. That is the difference between the yield of the 10 year and 2 year US Treasury bonds. Every time the yield curve inverts, it recession occurs soon after. Interest rate is also the opportunity cost of holding onto gold. The lower the opportunity cost, the more attractive gold gets.
  • Russia and China continues to sell oil to North Korea which are in opposition to USA’s (Trump) stance of strangling the living daylight out of DPRK. When an animal is cornered with no way out, it has no other choice but to attack.
  • The heart of the Israel – Palestine conflict is about Jerusalem. For decades, USA have played the mediator in this conflict. However, President Trump, the spokesperson representing the most powerful nation in the world, picked a side over the other by recognizing Jerusalem as Israel’s capital. Jerusalem is the line in the sand that cannot be crossed. Yet, it was. The two state solution is no more. It is now a one state solution and more Zionism. Escalation of conflict through a third intifada (Uprising) is highly likely

https://fred.stlouisfed.org/series/T10Y2Y

Divergence between Ethereum and Bitcoin

BTC/USD broke $13k support while ETH/USD took support at $800. Also on BTC/USD, a clear downtrend have been established (lower lows and lower highs). Food for thought.

FOMC members 2018: More hawkish committee vs 2017

The Federal Open Market Committee (FOMC) consists of twelve members–the seven members of the Board of Governors of the Federal Reserve System; the president of the Federal Reserve Bank of New York; and four of the remaining eleven Reserve Bank presidents, who serve one-year terms on a rotating basis. The roating seats are filled from the following four groups of Banks, one Bank president from each group: Boston, Philadelphia, and Richmond; Cleveland and Chicago; Atlanta, St. Louis, and Dallas; and Minneapolis, Kansas City, and San Francisco. Nonvoting Reserve Bank presidents attend the meetings of the Committee, participate in the discussions, and contribute to the Committee’s assessment of the economy and policy options.

https://www.federalreserve.gov/monetarypolicy/fomc.htm

  • Jerome H. Powell (New Chair): Dove

Powell is rated as neutral on monetary policy by the Bloomberg Intelligence Fed Spectrometer, compared to Yellen as somewhat dovish. He’s never dissented as a governor, though no board member has done so since 2005. A survey of 30 economists in March found he was slightly more dovish than average Fed central bankers.

“If the economy performs about as expected, I would view it as appropriate to continue to gradually raise rates,” Powell said in a speech in June. “Inflation has been below target for five years and has moved up only slowly toward 2 percent, which argues for continued patience, especially if that progress slows or stalls.”

https://www.bloomberg.com/news/articles/2017-11-01/here-s-what-you-need-to-know-about-powell-s-fed-chair-selection

  • Randal K. Quarles: Centrist?

No information about his monetary policy stance.

“Efficiency has to be equally important with safety and soundness in our regulatory responsibilities,”

“We need to achieve safety and soundness, but where we have choices we need to make the most efficient choices.”

https://www.reuters.com/article/usa-fed-quarles/efficiency-a-new-focus-in-regulating-wall-street-feds-quarles-idUSN9N1GG021

 

  • Lael Brainard: Dove

To conclude, much depends on the evolution of inflation. If, as many forecasters assume, the current shortfall of inflation from our 2 percent objective indeed proves transitory, further gradual increases in the federal funds rate would be warranted, perhaps along the lines of the median projection from the most recent SEP. But, as I noted earlier, I am concerned that the recent low readings for inflation may be driven by depressed underlying inflation, which would imply a more persistent shortfall in inflation from our objective. In that case, it would be prudent to raise the federal funds rate more gradually. We should have substantially more data in hand in the coming months that will help us make that assessment.

https://www.federalreserve.gov/newsevents/speech/brainard20170905a.htm

 

  • William C. Dudley: Dove

Dudley: Look, I think it’s very clear you don’t want to keep monetary policy too accommodative for too long. This is something that Chair Yellen talked about in her testimony. Because if you do, then you’re going to have to hit the brakes really hard later, move up rates very sharply and that could actually cause the next recession. So slow and gradual seems to me the right way to proceed, moving monetary policy relatively early to make sure the economy doesn’t overheat and that can actually allow you to sustain the economic expansion.

http://money.cnn.com/2017/02/28/news/economy/new-york-fed-dudley-interview-transcript/index.html

 

  • Raphael W. Bostic: Centrist according to Reuters

“I‘m still in that place,” Atlanta Fed President Raphael Bostic said of backing a December rate hike. “I‘m going to stay open (minded) but right now I‘m in a place where I‘m comfortable with the notion of continuing to go on our pace of a more balanced monetary policy.”

https://www.reuters.com/article/us-usa-fed-bostic-rates/feds-bostic-backs-december-u-s-rate-hike-but-says-open-minded-idUSKBN1DE2QL

 

  • Loretta J. Mester: Hawk

“I am not as troubled by where inflation is today. There is good reason to believe it is going to come back up,” Mester said at a monetary policy conference at the Cato Institute. Given the depth of the 2007 to 2009 economic shock, she said, an extended period of weak inflation “should not have been unexpected.”

 

  • Thomas I. Barkin: Unknown

 

  • John C. Williams: Hawk

“From today, four rate hikes through the end of next year is still kind of my base view,” Williams told reporters after an economics forecast luncheon. Williams rotates into a voting spot on the Fed’s policysetting panel next year. “We need to get from here to roughly 2.5 percent fed funds rate over the next couple of years.”

2017 Hawk / Dove 2018 Hawk / Dove
Jerome H. Powell, Board of Governors Dove Jerome H. Powell, Board of Governors, Chair Dove
Randal K. Quarles, Board of Governors Centrist? Randal K. Quarles, Board of Governors Centrist?
Lael Brainard, Board of Governors Dove Lael Brainard, Board of Governors Dove
William C. Dudley, New York, Vice Chairman Centrist William C. Dudley, New York, Vice Chairman Centrist
Charles L. Evans, Chicago Dove Raphael W. Bostic, Atlanta Centrist?
Patrick Harker, Philadelphia Centrist Loretta J. Mester, Cleveland Hawk
Robert S. Kaplan, Dallas Centrist Thomas I. Barkin, Richmond Unknown?
Neel Kashkari, Minneapolis Dove John C. Williams, San Francisco Hawk
Janet L. Yellen, Board of Governors, Chair Dove Vacant, Board of Governors N/A
Vacant, Board of Governors N/A Vacant, Board of Governors N/A
Vacant, Board of Governors N/A Vacant, Board of Governors N/A
Vacant, Board of Governors N/A Vacant, Board of Governors N/A
Count (Dove/Hawk/Centrist) 5/0/4 (9) Count (Dove/Hawk/Centrist) 2/2/3, 1 ?(8)

http://fingfx.thomsonreuters.com/gfx/rngs/USA-FED/010021SN4EG/index.html

From RANsquawk:

 

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