The FOMC meet this week Wednesday. The key focus is what they say about economic performance since the June meeting, specifically inflation and consumer spending – is low inflation still transitory? In Yellen’s recent testimony she mentioned that uncapped mobile data plans and low gasoline prices are a contributing factor. So we need to see if that is still the case.

We know they aren’t going to hike at this meeting though we need to pay attention to further comments on when the Fed will begin their balance sheet normalisation and how many hikes are likely for the remainder of 2017. We also want to pay attention to any comments about the stock market.

Analysis of the US Dollar exchange rate, US10Y yields and Fedwatch tool indicate that there is very little pricing in of further rate hikes 2017 with only a 42.8% chance of a hike in December. With the USDollar being so oversold and at the monthly reversal pivot MS2, if Dollar strength was going to kick in then this is the right price. With profit taking likely to take place at the start of the week, this might be a great opportunity to look for long opportunities against overbought currencies at key resistance levels with a stop at break even by Wednesday. A hawkish tone would also move the US10Y yield higher and stocks lower. A dovish tone would mean stocks up, yield down, Dollar weakness. Remember that we are in a low volatility time of the year.

Summary of June statement
At the June meeting, the Fed raised rates at their last meeting to 1 – 1.25%. The sentiment on the status of the economy was generally positive with economic activity expected to expand at a moderate pace. The unemployment rate is lower since the start of the year with moderate but solid job gains. Wages remain low though conditions are expected to strengthen somewhat further.

Household spending picked up in recent months with business fixed investment continuing to expand. The Fed saw inflation running somewhat below the 2% target with an expectation for inflation to remain at low levels for the next 12 months though to stabilise around 2% in the medium term. Yellen mentioned uncapped mobile data plans and gasoline prices as a contributing factor. The Fed are monitoring inflation closely.

Monetary policy remains accommodative with the size and timing of future adjustments remaining data dependent. The Fed expects economic conditions to evolve in such a way as to warrant gradual increases. Balance sheet normalisation to be implemented this year.

July Beige Book
Read here

Economic activity since June meeting
1. GDP
The US economy expanded an annualized 1.4 percent on quarter in the first three months of 2017, better than 1.2 percent in the second estimate, as consumer spending and exports increased more than previously anticipated. On the other hand, non-residential investment was revised lower and the drag from inventories was higher than initially estimated.

1.1. Consumer Investment
The University of Michigan’s consumer sentiment for the United States fell to 93.1 in July of 2017 from 95.1 in June, well below market estimates of 95, preliminary estimates showed. It is the lowest reading since October of 2016, mainly due to a fall in future expectations.
Retail sales in the United States decreased by 0.2 percent month-over-month in June 2017, following a downwardly revised 0.1 percent drop in May and missing market expectations of a 0.1 percent gain. It was the second straight month of decline in retail trade, mainly driven by lower sales at miscellaneous store retailers and gasoline stations. On a year-on-year basis, retail sales rose 2.8 percent.
Retail Sales Ex Autos in the United States went down 0.2 percent month-on-month in June of 2017, following 0.3 percent drop previous month and worse than market expectations of 0.2 percent rise.

1.2. Business Investment
The final seasonally adjusted IHS Markit US Composite PMI Output Index rose to 53.9 in June 2017, better than a flash estimate of 53 and above May’s final reading of 53.6. The reading pointed to the fastest pace of expansion in business activity since February, as output growth picked up to a five-month high in the service sector (PMI at 54.2 from 53.6 in May) while manufacturing activity increased the least in nine months (PMI at 52 from 52.7 in May). Composite Pmi in the United States is reported by Markit Economics.

1.3. Government Investment
Government Spending in the United States decreased to 2901.20 USD Billion in the first quarter of 2017 from 2907.60 USD Billion in the fourth quarter of 2016.

1.4. NET Exports
The goods and services deficit in the United States narrowed to USD 46.5 billion in May of 2017 from a USD 47.6 billion gap a month earlier and compared to market expectations of a USD 46.2 billion shortfall. Exports rose 0.4 percent to the highest value in nearly two years mainly boosted by sales of consumer goods and cell phones.

2. Employment
Non farm payrolls in the United States increased by 222 thousand in June of 2017, above an upwardly revised 152 thousand in May and compared to market expectations of 179 thousand. It is the highest figure in four months as employment increased in health care, social assistance, financial activities, and mining.
Unemployment Rate in the United States increased to 4.40 percent in June from 4.30 percent in May of 2017.
Average hourly earnings for all employees on private nonfarm payrolls in the US rose by 4 cents, or 0.2 percent, to $26.25 in June of 2017, following a 0.1 percent gain in May and missing market expectations of a 0.3 percent increase. Over the year, average hourly earnings have risen by 63 cents, or 2.5 percent.

3. Inflation
The so-called core PCE price index in the United States, which excludes food and energy, edged up 0.1 percent month-over-month in May of 2017, the same as in the previous month and matching market expectations. Year-on-year, the core PCE price index increased 1.4 percent after rising 1.5 percent in April.

4. Capital Flows
Overseas investors bought USD 57.3 billion of US assets, including short-dated instruments in May of 2017 after buying an upwardly revised USD 74.4 billion in April. Meanwhile, foreigners bought USD 91.9 billion of long-term US securities, including government and corporate, after buying USD 9.7 billion in the previous month. Foreign investors bought USD 46.4 billion of US treasuries, after selling USD 22.5 billion in April.

Economic Data Source: Trading Economics

Dollar Index Daily

MS2 is a reversal pivot with a target of MPP. Look at that stoch.

Dollar Index H4

We don't have it yet though a break above resistance with a pullback to support would form a very nice inverse head and shoulder pattern. All we know is that MS2 is a very key level of support and that we absolutely cannot sell here.

US10Y Daily

Our target is MR1 , not too far away from that now. Price would have to get through MM3 and form a reversal on H4 or H1 before heading down. Look at that stoch.

US10Y H4

Price has made a higher high and almost hit the weekly target though looks like we ran out of time on Friday. We expect Bulls to buy at MPP and for price to continue higher towards our target of MR1. That dotted red line above last week's MM4 is MM3 - note the resistance.

S&P 500 Daily

MR2 is a key reversal pivot with a target of MPP. Look at that stoch.

S&P 500 H4

A lot of demand at MR2 with price printing a double top. Definitely something you want to pay attention to. Price has not made a lower low yet and Bulls bought at the 21 on Friday.

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