by Pinchas Cohen
The Week That Was
- The super-combo rhetoric from Fed, Trump spurred Record Highs, while failing to actually deliver; may be the catalyst for a reversal
- Signs of fallout from Germany’s election begin to show, as Finance Minister Schauble steps down due to coalition negotiation
- Japan’s Prime Minister Shinzo Abe has called a snap election to take advantage of his rising popularity
US: Monetary Policy, Fiscal Policy and Actual Inflation
Investors have started to wonder if Christmas came early this year. For the moment, both Monetary and Fiscal policy seem to finally be working together. Will Friday's Nonfarm Payroll release bolster or undermine the euphoria?
Higher Interest Rates
Last week, Fed Chief Janet Yellen said she believes the right course of action is to raise interest rates without waiting for inflation to reach its 2-percent target. Her view sidestepped, and rendered moot, an argument within the divided Fed on whether the current low inflation is a short- or long-term issue.
Tax Reform
US President Donald Trump finally unveiled his tax reform plan. It features two pro-business objectives: (1) simplifying a cumbersome tax code, which would save businesses time and money, and (2) cutting the corporate tax rate from 35-percent to 20-percent.
This pro-business growth duo buoyed bulls, who led the S&P 500, NASDAQ Composite and Russell 2000 to new records. A record close before a weekend is especially bullish, as it demonstrates trader confidence. It shows they are willing to remain exposed throughout the weekend, a time during which so many different things could go wrong. That is certainly decisiveness.
The Higher the Hope, the Harder the Fall
However (and you knew this was coming), these records are based on views, statements, proposals and promises—essentially all talk. At some point, investors will surely demand: “Show us the money!” For the Fed rate hike, at least, there's a set date in December when that could happen. Regarding the tax reform proposal, investors will have to endure the ups and downs of politics till the bill passes, or not—and whether, before it comes up for a vote it will be watered down through parliamentary compromise.
Should the Fed and Trump not show investors the money, investors who giveth via higher stock prices can also taketh away.
Writing on the Wall?
For growth during Q2 and beyond, the writing on the wall may be signs suggesting the broad economy grew more slowly than expected, with corporate profits for domestic companies advancing at an annual 0.1-percent rate compared to large multinationals, which have recorded two straight quarters of double-digit profit growth. Unfortunately, the data in the next few quarters will be suspect because of the economic impact of mega-hurricanes Harvey, Irma and Maria.
So, while investors may currently be thinking Christmas came early this year, by the time the actual holiday arrives, investors may discover Santa only left lumps of coal in their stockings.
Germany: Election Uncertainty Has Begun
The uncertainty of Chancellor Angela Merkel’s diminished power in the recent election has already born poisoned fruit, when Finance Minister Wolfgang Schauble was forced to step down, a sacrifice to coalition negotiations, rendering additional uncertainty to the euro.
Japan: Abe Takes a Page From UK Theresa May's Gambit
With his popularity on the rebound after a series of summer scandals, Japanese Prime Minister Shinzo Abe dissolved parliament this week and called a snap election for 22 October. Abe asked for a new mandate to deal with the growing threat from North Korea and said it is urgent that Japan's social security system be rebalanced to cope with the growing number of retirees.
This mirrors UK Prime Minister Theresa May's gamble of June 8, when she called a snap election in order to strengthen her power base. Unfortunately her gamble didn't pay off. Will his? How might it affect the yen? After the UK election, sterling took a hit when May lost, rather than gained, power. As well, the euro also took a hit when Merkel's power was eroded after the German election.
The Week Ahead
All times listed are EDT
Sunday
19:50: Japan – Tankan Large Manufacturers Index (Q3): expected to rise to 18 from 17 a month earlier.
The weekly trading pattern for the USD/JPY pair was plagued with volatility. That's generally a signal before a reversal, which fits its location on the market wrap, as it nears the resistance of the top of its falling channel since March.
Monday
4:30: UK – Manufacturing PMI (September): activity expected to slow slightly, as the index drops to 56.5 from 56.9.
The rising pound found resistance as we predicted at the July-September peak. It closed above it two weeks ago but could not maintain its advance. It's not all bleak, however, as the July peak since the trend has been rising since October, providing ample support. At this point the expectation is for the upward trend to resume.
5:00: Eurozone – Unemployment (August): rate expected to fall to 9% from 9.1%.
10:00: US – ISM Manufacturing PMI (September): forecast to drop sharply, to 52.4 from 58.8, with hurricanes likely to have had an effect.
23:30: Australia – RBA Rate Decision: no change in policy expected, but comments on the outlook likely to influence the AUD.
Tuesday
1:00: Japan – Consumer Confidence (September): expected to fall to 43.1 from 43.3.
Japan's TOPIX Index closed at its highest point since early August 2015. During that time it developed a potentially bearish pattern. Over the week before last it developed a bearish Shooting Star whose resistance held when it couldn't not only close at, but not even penetrate the 1679.83 high. Last week it developed a Hanging Man, whose bearish implications kick in only after a confirmation on a close below its real body in the following session. Since this is a weekly chart, it will have to be a weekly candle under 1674.00.
4:30: UK – Construction PMI (September): expected to rise to 51.4 from 51.1.
Wednesday
4:30: UK – Services PMI (September): expected to fall to 53 from 53.2.
The FTSE 100 Index has reached a falling channel since August 8, suggesting supply should overcome demand.
8.15: US – ADP Employment Report (September): 186,000 jobs expected to have been created, from 237K a month earlier. Markets to watch: US indices, USD crosses
10:00: US – ISM Non-Manufacturing PMI (September): forecast to rise 57.5 from 55.3.
10:30 – US EIA Crude Oil Inventories (w/e/ 29 September): previous reading saw a drop of 1.85 million barrels.
Thursday
8:30: US – Trade Balance (August); Initial Jobless Claims (w/e 30 September): trade deficit expected to increase to $45 billion, while 236K claims expected.
The US 10-year yield has reached its downtrend line since early May, where it might meet with resistance, suggesting Treasuries will rise.
Friday
8:30: US – Nonfarm Payrolls (September): 165K jobs expected, from 156K a month earlier, while the unemployment rate is expected to rise to 4.5% from 4.4%; Average Hourly Earnings forecast to rise 0.2% MoM from 0.1% in August.
The USDCAD pair rose between September 8 and September 29. Both last days produced potentially bearish Shooting-Stars, in which the second respected the resistance of the first – upon nearing the downtrend line since May 5. This suggests the pair can’t overcome the key 1.2500 round psychological level.
8:30: Canada – Employment Data (September): 22,900 jobs expected from 22,200, while the unemployment rate is forecast to rise to 6.3% from 6.2%.
10:00: Canada – Ivey PMI (September): forecast to rise to 59 from 56.3.