Calendar Week 02-2023
Hi everyone, welcome to 2023 and Happy New Year. Hope you all had a safe and enjoyable festive season these last few weeks. We are back, and what a way to start the year!
Bonds smashed, USD smashed, Oil smashed whilst stocks, gold, crypto spring higher. This all on the back of the first major news event for the year, the USA Non-Farm Payrolls (their employment data).
The figure came out with mixed results. The bad news was the number of “recorded” unemployed rose more than expected and the Hourly Earnings dropped, whilst the good news was that the rate dipped to 3.5%. However, in this day and age of inflation wars, bad news is good news! So the market took off, effectively front running the US Fed and its decisions, with the expectations of a “soft” landing and no more rate rises.
To follow the Fed or follow the Market?
This is the tricky question. The US Fed position is clear, they are and continue to be hawkish. They have even commented on the “unwarranted expectations that we will ease monetary policy”. Therefore it is my stance that one day of “bad news” does not mean inflation is under control and whilst the Fed may not raise rates in February (and they still could) they certainly will not be lowering rates in the first half of 2023 – not that I can see.
It took 25 months for inflation to run from 0.5% (June 2020) to its peak of 9.1% (July 2022), and that was with a massive amount of stimulus happening around the world. To think that inflation will drop back under 3% (from the current 7%) in a matter of months purely off the back of a 4% raise in rates, to me seems overly optimistic. I think rates are close to peaking, there may be a few more hikes to come yet, but more importantly they will not be falling. They will remain high for longer than the market is suggesting.
The US Inflation numbers are due this week on Thursday night Australian time.
For long term projections, the stock market is more often wrong. Yes, for long term investing it is wise to hold positions for years. But to be bullish stocks this week, month or even quarter is not the right idea. Bond market is smarter and more often correct. However, it too has got it wrong. Judging by the moves on Friday night, with the US 10 Year bonds tanking 25 basis points to 3.55% – whilst the US Fed rate is 4.5% – is completely out of line with the US Fed and the data we can see. Even the 2 year bond fell to 4.2%, showing that the expectations of rate falls are coming soon – is as the Fed said “unwarranted”.
Currency Guidance
USD – Whilst the above suggests fundamentally not be a seller of Greenbacks, technically the US dollar looks weak against the Yen and EUR (its major basket constituents) as the Index posts a bearish engulfing bar. We might be looking at the beginning of a new cycle lower that could put it close to the 101 price range.
AUD – In terms of interest rate differential against the majors, the AUD is only above EUR and the YEN, but well behind the curve for all others. I still see no reason to buy Aussie dollars, even with China now out of lock down. It does look like a buy against US, but that is more the USD story really. However, there maybe some short term opportunities there. Against the Kiwi it looks like a good sell. Against the GBP seems to be range bound from 1.75 to 1.82 and due to turn off the lower side of it. Elsewhere it is rather messy and not worth the time for now.
EUR – I like the EURUSD and EURCAD for buying opportunities this week, although US CPI might need to be considered avoiding.
GBP – Technically the GBPAUD range is worth a look, but also GBPCAD for a new cycle above the EMA as oil continues to be clubbed lower.
JPY – DollarYen has been in a nicely formed channel for a few months now but there looks to be good support just a tad lower at 130.
