Analysts at Nomura explained their GDP tracking update after today’s retails sales disappointment and CPI beat.

Key Quotes:

“January core retail sales were weaker than we expected with downward revisions to sales in November and December, implying less PCE growth in Q4 as well as Q1. In addition, January core CPI inflation was stronger than we expected. 

Higher-than-expected core CPI inflation points to modestly stronger PCE inflation in the near term, which we use to deflate core retail sales, implying less real PCE growth in January and in Q1. 

However, the weaker-than-expected core retail sales suggest that retail inventory buildup could be greater in Q1 than our estimate. 

Moreover, the December business inventories report included upward revisions for November and the growth in December is likely greater than BEA’s assumption, implied by the BEA’s advance estimate of Q4 GDP. 

This suggests that inventory investment in Q4 was likely stronger than the BEA’s assumption, which lowered our estimate of Q1 inventory build up due to a higher jumping-off point from Q4. 

Altogether, we lowered our Q4 real GDP tracking estimate by 0.1pp to 2.5% q-o-q saar and our Q1 real GDP tracking estimate by 0.4pp to 2.0% q-o-q saar.”

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It was a mixed picture today in Forex and price action that needed some diagnostics to cognize it all. 

Firstly, the markets have been pricing in three rate hikes from the Fed in 2018 but have been adjusting to the recent anticipation of inflationary pressures since last month’s NFP’s and higher wages leading to a spike in US yields and the recent stock market rout, termed by some observers, as just a “healthy correction that needed to happen”.  Stocks fell, margins were called denominated in dollars, the dollar rose, yen and CHF went bid and gold was the laggard behind the safe haven plays. 

However, on today’s CPI, (Street starts calling for four rate hikes in 2018), combined with a poor retail sales, leading to terrible downgrades to the GDP trackers and the dollar took a beating. Despite higher US yields, with the 10-year note yield moving within a range of between 2.8059% –  2.9095% (the high scored by end of the day post-CPI data ) and after opening at 2.8312%, the DXY was down over -0.60% within a day’s range of 89.057 – 90.124.  The Atlanta Fed model is now at 3.2% from 5.4% two weeks ago.

Another factor weighing on the outlook for the dollar is the fact that the  Eurodollar curve beyond 2019 suggests a harder landing for US economy than what was first priced into the currency, coupled with rising US deficits and potentially tighter rate policies abroad, the dollar is likely to stay lower for longer from here. A break below 88.67 DXY and that support line open up a drop to 86.69 and 85.00 as the last defence in the longer term.

As for the other currencies, EUR/USD opened near to 1.2355 before the dollar rallied on the CPI printing EUR1.2275 before retails sales were digested and the market bid up the euro to 1.2335 before risk accelerated. On the rally in risk, the euro was dragged higher by a bid in EUR/JPY and dollar weakness and broke through 1.2440.

GBP/USD was well bid by the close of the NY session tucked in around 1.3990 and higher by +0.75% having traded within a range of 1.4008-1.3801. The retails sales was the saving grace for the bulls as the CPI initially had the price testing the lows of that range while backed up by the prospects of a May (64%)/June (86%) probability for a BoE rate hike.

EUR/GBP was off by 0.1% at 0.8885 within a range of0.8920-0.8876 and falling just shy of 0.8927 as being the Jan 12the high this year.  In terms of data from the eurozone, EZ Q4 GDP matched the forecast of 0.6% qq and 2.7% yy while EZ IP came in at  5.2% yy and beat the 4.2% forecast. 

The yen was a top performer by the close of play in NY, picking up the safe haven bid despite a turn around in stock prices. Both the S&P and Dow broke up back to test their 200 hourly SMA’s and on to test the 10-D SMA’s, despite a jump in Treasury yields.   USD/JPY fell below the  2017 low of 107.32 but was still holding above the  61.8% of 99-118.66 rise at 106.51.

As for the antipodeans, well, they took advantage of this and the Kiwi’s blue-sky rally took the price up to challenge the descending trend line resistance at 0.7374. AUD/USD opened near 0.7870 before the sales data took down the dollar and enabled the Aussie to clear the Feb 6th highs before a look in at 0.7920 towards the close while traders look ahead to the Jan jobs data. 

Key events ahead 

Analysts at Westpac offered their outlook for today’s risk event:

“Australia’s Jan labour force data is due at 11:30am Syd/Mel. Job creation has been very strong by historical standards over the past year, reaching 3.4%yr in Dec when another 34.7k net new jobs were reported. It is very difficult to sustain such a pace – GDP probably only grew about 2.5% over the same period. So a negative reading on employment is a risk at any time, simply as a statistical correction. But with various other indicators of the job market still positive, Westpac’s +15k forecast is in line with consensus.

The unemployment rate seems likely to remain at 5.5%. The 5.4% reading of Oct and Nov 2017 was the lowest since 2013.

Bank Indonesia is expected to hold its key interest rate steady at 4.25% while Singapore releases Jan exports data.

The US data calendar holds some interest though isn’t vital – Feb regional manufacturing surveys from the New York (Empire State) and Philadelphia Federal Reserve banks, Jan producer prices, Jan industrial production and Feb NAHB homebuilder sentiment.”

Key notes from US session:

Wall Street clinches strong gains after initial slump

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AUD/USD rises as the Greenback tumbles on US inflation figures.
Aussie employment data at 00:30 GMT

AUD/USD heads into the overnight session testing back into 0.7920 following a volatile run up the charts on higher-than-expected inflation data from the US driving the Greenback lower. 

The Aussie declined for the first half of Wednesday trading, seeing the US Dollar lift during the London session after mixed inflation data from the UK and GDP figures from the Eurozone failed to beat expectations. Everything came off the rails after US inflation numbers beat expectations, sending the Greenback tumbling broad-market.

AUD/USD ended yesterday up 0.87%, reaching a peak of 0.7934 just before the New York close, and is now down slightly in Asia markets ahead of Australian employment figures for January at 00:30 GMT. Market analysts expect the Unemployment Rate to remain unchanged from the previous period at 5.5%;  forecasts for the Employment Change, while still positive, are anticipating a smaller number at 15k versus the previous reading of 34.7k.

AUD/USD Technicals

With today’s bullish move erasing last week’s losses, the pair is set to continue moving higher assuming it can confidently hold at this level. AUD/USD has closed bullish over the 34 EMA once more, and the 200-day SMA is still providing support from the 0.7760 region. Continued bullish action will run into resistance at 0.7960, with support at 0.7908 and 0.7876.

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Analysts at Westpac noted the events and price action in global marks overnight.

Key Quotes:

“US bond yields rose steeply on stronger than expected inflation data, though retail sales were weak. The US dollar bounced initially then surrendered its gains. This saw AUD/USD rally >1 cent from its lows to above 0.79. Equity markets rose. Today we see Australia’s Jan labour force data and a flurry of second-tier US data.

US CPI rose 0.5% in Jan (vs 0.3% expected), keeping the annual pace at 2.1%. The core measure rose 0.3% (vs 0.1% expected), for a steady annual pace of 1.8%. Most of the upside surprise came from apparel (up a huge 1.7% in the month), while transportation costs also jumped (+1.8%) and medical care was above trend at 0.4% too. All told it looks like three components account for much of the upside surprise: clothing, cars and medical costs. There was also an update to hourly earnings, which rose 0.8% in Jan (from an upwardly revised 0.6% in Dec).

In contrast, the recent strong run of retail sales growth ended in Jan with a 0.3% fall (vs +0.2% expected). The core “control” group retail sales was flat in Jan and Dec was revised down sharply, from 0.3% to -0.2%. Economists cut their forecasts for Q1 GDP.

US 10yr treasury yields jumped after the CPI data, from 2.82% to 2.91% – the highest since Jan 2014. 2yr yields rose from 2.10% to 2.16%. Fed fund futures yields also rose, pricing the chance of another rate hike in March at effectively a done deal (Bloomberg calculations).

The combination of softer spending and higher inflation wasn’t ideal for equities and the S&P 500 opened slightly softer an hour after the data, but then settled into a steady rally, joining European equities in posting decent gains.

The US dollar bounced on the hot inflation data but within 2 hours had given up its gains across the board, down against all G10 currencies. USD/JPY was particularly soggy, popping up only briefly to 107.50 before resuming its decline to 106.72 – the lowest since Nov 2016.

EUR/USD dropped from 1.2350 to 1.2276 but was back to flat after about 90 minutes and then extended the rebound to 1.2442. GBP/USD retested 1.4000, up a net 0.7% over the day. USD/CAD fell 1% from its post-CPI highs to 1.2525.

AUD/USD sank from 0.7860 to 0.7773 but was back to flat on the day by the NY lunchtime and continued with the euro et al to 0.7910 by late NY. NZD rose a net 1.2% on the day to 0.7365, with earlier help from a rise in NZ inflation expectations. As a result, AUD/NZD broke below a week-old range, from 1.0750 to 1.0716 – a six-month low.”

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Analysts at ANZ reviewed today’s NZ REINZ Housing Market Statistics.

Key Quotes:

“The bottom line

National sales volumes bounced 3.5% in January to their highest monthly total since March 2017 (seasonally adjusted). However, days to sell increased and house prices were pretty flat on the month. In short, housing market activity is well off its lows, suggesting house price inflation has likely also found a floor, but the market remains much cooler than it has been. In our view, the market is unlikely to take off again due to affordability constraints (Auckland data was mixed), credit headwinds and new Government policies.

Key results

We estimate that seasonally adjusted house sales volumes lifted 3.5% in January to be up an impressive 10.0% q/q – but only 3.2% y/y. Looking through the noise, monthly sales have clearly bounced off the bottom (up 17% from their September lows) but have a way to go before they reach recent highs (still 6% below the 2017 high, and 12% below the average experienced over 2016).

The time to sell a property nonetheless lengthened. The national median number of days to sell increased by 2.3 days (sa) to 37.2 days in January. It is below the historical average of 39.6 days, but much higher than the low of 30.8 days seen in mid-2016.

National house prices eked out a sixth straight monthly gain. Our preferred measure of house prices – the REINZ House Price Index (HPI) – posted a 0.3% m/m lift, which saw annual growth ease to 3.4% y/y from 3.7% in December.

Auckland data was mixed. We estimate Auckland sales volumes fell 1.1% m/m (sa) in January but this followed a strong lift in December and they are up 10.1% q/q.  The median number of days to sell lifted by 2 days to 37.3 days (back above its historical average). Auckland house prices (HPI) were flat after five consecutive monthly lifts to be flat y/y too (+0.2%).

Ex-Auckland data was stronger. Sales volumes rose 6.4% m/m. At 6.7% y/y, price growth ex-Auckland continues to well outperform our largest city, where prices remain most out of whack with incomes.”

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NZD/USD bulls are gunning for a test of the 0.74 double top highs.
NZD/USD RSI and momentum leaning bullish on 4hr and daily time frames. 

NZD/USD rallied from 0.7240 on the turnaround in the greenback with the DXY dropping to 89.038 from above the psychological 90 handle and is currently trading at 0.7368, up 1.28% on the day, having posted a daily high at 0.7374 and low at 0.7240.

AUD/USD: Australian dollar soared on dollar’s slump

Despite higher US yields, with the 10-year note yield moving within a range of between 2.8059% –  2.9095% (the high scored by end of the day post-CPI data ) and after opening at 2.8312%, the DXY was down over -0.60% within a day’s range of 89.057 – 90.124. The antipodeans took advantage of this and the Kiwi’s blue-sky rally took the price up to challenge the descending trend line resistance at aforementioned highs.

Overnight events and price action: CPI’s firmer headline was the catalyst – ANZ

Price action is telling

“The price action is telling and suggests other factors – trade concerns, emerging market growth, Chinese holiday, deficit concerns, oil prices etc are at play,” explained analysts at ANZ who also argued that it looks like it will take something more material to knock the kiwi off its perch.

NZD/USD levels

NZD/USD has broken through the channel’s ascending resistance level 0.7340/50 and is now up to test 0.7380 while RSI enters oversold territory with some potential to move deeper but meeting hourly resistance by the same metric. 

4hr momentum is very strong, the strongest it has been for this year while the daily sticks offer more room to go on the upside till in both RSI and momentum. Bulls will have eyes for a test of the 0.74 handle and be challenging the late Jan start of Feb double-top highs. 0.7420 could prove to be a tougher area of resistance. 

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All of the three major indexes added over 1% each after a three-digit pre-opening slump.
Tech-related equities led the way higher, disappointing retail sales helped.

Wall Street closed the day with strong gains, with indexes at their highest in a month, reverting a pre-opening huge slump. The DJIA shed roughly 470 points following the release of US inflation data, which came above market’s expectations, reviving concerns of a faster pace in rate hikes, but closed the day at 24,893.49 up 253 points. The Nasdaq Composite and the S&P also advanced, up 1.86% and 1.34% respectively to 7,143.61 and 2,698.63.

Investors shrugged off concerns about higher inflation as retail sales disappointed, while tech-related shares soared, in spite of market news, with Facebook, Amazon and Apple posting strong gains. US yields in the meantime, reached fresh 4-year highs, with the 10-year note yield ending the day at 2.91% and the 30-year note one closing at 3.18%.

The DJIA hovers around 24,900 after the close, up for a fourth consecutive day and poised to extend its advance, as in the daily chart, the index moved further above a bullish 100 DMA and the 61.8% retracement of last week’s slump, while hovering around last Thursday’s high of 24,954, the immediate resistance with gains above the level favoring a continued advance toward a complete retracement to 25,512 during the following sessions. 

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GBP surged on broad USD weakness.
Market is concerned about Brexit effects on UK economic growth.

GBP/USD is now trading around 1.4002, in late New York session,  with the pair soaring by over 0.80% and hovering around  its daily high on a plunge in the greenback   amid muted retail sales and subsequent series of GDP downgrade for the US.

Although US CPI came upbeat today, retail sales came subdued. As a result, Atlanta Fed and several other institutions have lowered their Q1 US GDP´s  projections on weak consumer spending or private consumption and the USD  was doomed across the board. Higher US bond yields after upbeat CPI today may be also a big headwind for USD on risk aversion as it bound to affect the stock market eventually.

Earlier at EU session, GBP/USD was under pressure and edged down by almost 0.15% on IMF’s concern of Brexit uncertainty´s effects on the UK’s economic growth. The IMF estimated the UK GDP at 1.6% for 2018 and CPI at 2.6% by Dec’18, but in the medium-term GDP may slow down to 1.5% under baseline assumption of continued progress in Brexit talks; UK outlook depends crucially on the outcome of negotiations with the EU.

In another report, a BOE agent projected that UK´s activity growth will be steady but at a modest pace. It also noted that UK services firms report a pickup in growth, good exports volumes strengthened, construction output growth had continued to slow, recruitment difficulties had remained at an elevated level and pay growth had picked up; investment intentions remain positive but mainly reflected investment to maintain business activity.

Thus, both IMF & BOE agent reports look quite cautious on UK economic prospects, which  contrasts to an unusually hawkish-hold stance by the central bank (BOE/MPC) last week and subsequently GBP is under pressure as it’s a victim of UK politics rather than economics.

UK reported higher than estimated core CPI yesterday for Jan (2.7% vs est 2.6%; prior: 2.5%), headline CPI was also on the higher side (3% vs est 2.9%; prior: 3%) and well above the BOE´s target level of 2%, but PPI & RPI came muted. Also, the headline CPI is well within BOEs forecast and thus market may have some credibility issue with any BOE rate hike in March.

Although UK’s Hammond (Finance minister/Chancellor) is quite confident that the UK can reach a good deal with the EU, market is not so convinced about prospects of a soft Brexit. UK PM May will meet with Merkel this Friday at Berlin to discuss Brexit with a press briefing afterward.

Technical view:

Price action suggests that for any further rally, GBPUSD must stay above the 1.4077 zone; otherwise it will come down again sustaining below 1.4034.

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Analysts at Rabobank explained that for months the market has been largely ignoring the reassurances of the BoJ’s Kuroda that he remains fully committed to the BoJ’s huge QQE programme. 

Key Quotes:

“Strong growth in Japan and a tight labour market has raised suspicions that the BoJ could start to back out of this policy in the foreseeable future.”

“However, CPI inflation in Japan remains well below its target and low inflation expectations are deeply ingrained in Japan’s nation psyche.”

“It is our view that the market speculation that the end of QQE is nigh is premature.”

“On the assumption that risk appetite stabilises we expect USD/JPY to recover some ground and head higher in the months ahead.”

“We retain a 3 mth target of USD/JPY112.00.”

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WTI Crude Oil extended its gains a nears $61, a 3% rise on the day and the highest this week.
A favorable market mood in Wall Street supports higher prices

The price of WTI Crude Oil extends its gains and has reached a high of $60.83 in the American afternoon. It has surpassed the rate that was seen on Monday. Prices of oil have been rising alongside US stocks and as the VIX volatility index drops to the lower ground, implying a calmer market mood ahead.

This is a sharp turnaround from the early hours of the US session. The inflation report came out above expectations, at 1.8% on core CPI and 2.1% on headline CPI. Higher inflation implies a quicker rise in interest rates. The initial reaction was adverse for the price of oil, and it reached a low of $58.20.

Oil is moving higher alongside share prices and also as the weekly report of crude oil inventories showed a build of 1.8 million barrels, below a rise of 2.8 that was expected. 

Tomorrow, the economic calendar features the Producer Price Index which will provide further information about inflation. In addition, the US publishes the New York and Philadelphia manufacturing indices as well as the weekly jobless claims report. 

Levels to watch on WTI Crude Oil

The $60.83 level is the next cap. Further above, $62.07 served as resistance last week and is the next level to watch. On the downside, the round level of $60.00 provides support. It is followed by the low of $59.20 and then by $58.20, the low point mentioned earlier. 

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