The shift in focus away from stocks toward commodities and currencies has continued overnight and into this morning. US index futures, the FTSE and the Dax are all pretty much flat this morning while the Hang Seng rallied 1.5% overnight on improving attitudes toward China.
The biggest driver of market action over the last 24 hours and continuing into today has been the start of an overdue correction in the US Dollar. The massive dollar drive upward had been built on speculation that incoming President Trump would be able to push through fiscal stimulus and other business friendly policies without much opposition or consequences sparking higher inflation.
Recent US Dollar trading has been pricing Trump to perfection anticipating 4-5 rate hikes this year compared with expectations for 2 2017 hikes before the election and 3 in the December dot plot of Fed member forecasts. Yesterday's Fed minutes indicated uncertainty over what type of fiscal program we could see and when it may arrive. Also, Fed members indicated that the higher US Dollar could dampen inflation pressures and the US economy. Note I have been warning for a while that thew higher Dollar could have a negative impact on corporate guidance in the upcoming earning season.
The Fed minutes didn't give traders any reason to get more hawkish so instead we are starting to see some players taking money off the table. The US Dollar rally has been technically overextended and exhausted for a while now, and a correction has been overdue. The easing of USD pressure has lifted the lid off other currencies sparking relief rallies in gold, JPY and EUR.
Commodity currencies are also on the rebound with AUD and CAD climbing. CAD is starting to catch up to recent oil price gains after lagging lately. WTI has been trading higher overnight following a surprise 7 million barrel drop in API crude oil inventories. DOE inventories are due later this morning with the street expecting a 2.0 million barrel drawdown.
AUD, meanwhile is benefitting from higher copper prices and speculation that resource demand may improve this year. Overnight service PMI reports from China, Japan and the UK continued the stream of evidence this week that a more broadly based world economic recovery is underway.
US service PMI figures are due mid-morning but first ADP payrolls could kick off another round of Fed speculation in US markets. The street is expecting private sector payroll growth to slide to 175K in December from 216K in November. The employment component of the ISM Manufacturing PMI report improved in December. I also think that the pent up hiring demand spilled over into December just like the pent up demand for stocks did. Because of this my ADP Guess for this month is 225K. A strong report could shore up support for USD while a disappointment could accelerate the correction.
Macy’s Nov/Dec same store sales (2.1%) cuts full year EPS guidance to $2.95-$3.10 from $3.15 to $3.40
US API Crude oil inventories (7.4 mmbbls)
Service PMI Reports:
UK 56.2 vs street 54.7
Australia 57.7 vs previous 51.1
Japan 52.3 vs previous 51.8
China Caixin 53.4 vs previous 53.1
Upcoming significant economic announcements include:
8:15 am EST US ADP Payrolls street 175K vs previous 216K
8:30 am EST US jobless claims street 260K
8:30 am EST Canada industrial prices street 0.5%
8:30 am EST Canada raw material prices street (1.8%)
10:30 am EST US natural gas storage street (84 BCF) vs previous (234 BCF)
11:00 am EST US DOE crude oil inventories street (2.0 mmbbls)
11:00 am EST US DOE gasoline inventories street 1.0 mmbbls
Service PMI reports:
9:45 am EST US Markit street 53.4
10:00 am EST US ISM street 56.8