by Pinchas Cohen
Key Events
- Bonds rally on weak inflation and reduced probability of Trump reflation
- US stocks hit record, despite weak inflation and low chance of Trump reflation
- Dollar closes at its lowest since September 3
- NASDAQ Composite, yen and gold pass top, suggesting bullish consolidation
- API reports surprise build; EIA expected to follow suit
Global Affairs
Equities in Asia and futures in the US, UK and Europe advanced following both the S&P 500 and NASDAQ Composite closing at record levels, with the latter also achieving a record high. This came even as hopes for a Trump reflation took yet another step backward after the GOP healthcare bill was scrapped—and its savings which would have been used for tax reform—and weak inflation data.
The low CPI, compounded by the Fed’s slower path to raising rates, caused top failures for the yen and gold, turning them into bullish consolidation patterns with an upside target equivalent to the size of the patterns.
On one hand, the ever-rising concern about both US President Donald Trump’s ability to enact fiscal stimulus, as well as weak global inflation data—most recently in the UK, where it dropped to an unexpected 2.6 low on lower gas prices—sent Treasuries, bunds and gilts higher.
At the same time the dollar closed at its lowest level since September 8.
On the other hand, US stocks achieved fresh records. The apparently never-ending US equity rallies are challenged only by the apparently continuous Trump scandals and agenda failures. The new highs, despite yet another failure to move Trump’s pro-business agenda forward, may suggest investors are no longer counting on him for growth.
However, if that’s the case, why would equities rally even after weak inflation and the Fed plan for a slower path to interest rates hikes? In fact, equity investors responded to the Fed’s dire and somewhat embarrassing announcement that it was lowering its economic outlook by buying yet more equity. Investors believe stocks will continue to rise on a worsening economy and the use of cheap money to prop up equity valuations.
Therefore, even if one would argue that inflation is weak because of Trump’s failure to kickstart the economy per his platform, the latest record-highs prove that investors are not only over Trump but also over growth.
Unlike equity investors, bond and dollar traders don’t benefit from a slower path to rising rates propping up high equity valuations. Hence, they are buying bonds now, and selling the dollar. The only potential benefit to bonds would be a breaking point in these lofty stock prices and a sell-off leading to higher Treasury prices.
Bond traders—and 'old-fashioned' equity traders—who still buy on a growing economy are waiting on earnings results to see (1) whether they will be strong enough to warrant record share prices and (2) to determine if the global economy is able to handle higher interest rates. The focus will be on central bank meetings in Japan and Europe this week alongside earnings reports released today by companies such as Morgan Stanley (NYSE:MS) and Qualcomm (NASDAQ:QCOM).
Traders have reduced their bets regarding an additional hike this year from the July 7 high of 60 percent to the current 40 percent, based on the current effective Fed funds rate and forward overnight index swap levels.
Upcoming Events
- Building permits—released at 8:30 EDT—are estimated to have risen from 1.168M in May to 1.200M in June. Even if estimates are met, or if permits stay under 1.228M, they will still be in a downtrend since their January 1.300M peak. If they are reached, the dollar could react positively on some—or any—good news. Alternatively, it ignore this modicum of good news as it has been ignoring any good news this year, instead reacting to just the bad news.
- Crude Oil Inventories will be released at 10:30 EDT. Yesterday, the API unexpectedly reported a 1.628 million barrel buildup, while the EIA is expected to forecast crude oil inventories have been reduced by 3.214 million barrels, after the previous 7.564-million-barrel draw. The trend over the last 15 weeks, from both the API and EIA, is down. Inventories have decreased an average of 2.88 million barrels a week according to the EIA and 2.435 million barrels a week according to the API. Technically, Monday’s bearish sentiment is holding, suggesting an end to the corrective rally.
- The Bank of Japan meets for an interest rate decision late tonight, which is expected to remain unchanged at a negative 0.10 percent. The bank will also release its monetary policy statement and outlook report. Technically, the USD/JPY completed a H&S top on July 7, but the top failed when it fell back into the pattern on July 14. Generally, price moves reverse on failures, suggesting that the yen will continue to strengthen, compounded by the ever-receding Trump and Fed reflations.
- The ECB meets Thursday for an interest rate decision at 7:45 EDT with a press conference at 8:30 EDT. Bloomberg Intelligence forecasts interest rates will remain at 0.00 percent. Reuters reported that unidentified officials said the bank will keep asset purchases open-ended.
Market Moves
Bonds and currencies
- The yen was flat at 112.05 per dollar.
- The pound was little changed at $1.3038.
- The Dollar Spot Index was up 0.1 percent after its 0.5 percent slide yesterday.
- The yield on 10-year US Treasuries was up two basis points at 2.28 percent, though down six basis points this week after dropping five basis points last week.
- Australian 10-year government bonds slid two basis points to 2.73 percent.
Stocks
- The Euro Stoxx 50 advanced 0.4 percent after sliding 1.1 percent the previous day.
- The Stoxx Europe 600 gained 0.6 percent after falling 1.1 percent Tuesday.
- The MSCI ACWI Index of emerging and developed markets rose 0.1 percent, extending gains to a ninth day.
- Chinese shares led in Asia, with the Shanghai Composite jumping 1.4 percent. Hong Kong’s Hang Seng was up 0.5 percent.
- Japan’s TOPIX swung between gains and losses.
- South Korea’s KOSPI rose 0.2 percent.
- Australia’s S&P/ASX 200 Index climbed 0.8 percent as bank shares rose. Analysts said new capital requirements looked fairly benign.
- S&P 500 Futures added 0.1 percent after the underlying gauge hit a record close at 2,460.61.
Commodities
- Gold dropped 0.2 percent to $1,239.92 an ounce.
- Iron ore futures jumped 3.5 percent, building on a 7 percent advance over Monday and Tuesday.