Article / 29 January 2018 at 2:49 GMT

Macro Monday: Will Yellen hike rates 50bp this week? — #SaxoStrats

Global Macro Strategist / Saxo Bank Group - Singapore Hub
Singapore
 
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  • USD traders are awaiting Janet Yellen's final FOMC meeting this week
  • Treasury Secretary Steven Mnuchin's comments smashed the USD last week
  • The Malaysian rate hike shows that the Fed is not the only game in town

By Kay Van-Petersen

Previous week's highlights and takeaways

  • US dollar, Davos summit: Treasury Secretary Mnuchin smashes US dollar. Also US budget extended to February 3, before horse trading resumes
  • Malaysia: Raises rates 0.25%, unexpectedly
  • NZ/AU: Kiwi Q4 CPI missed big time 1.6%a 1.9%e, reversing AUDNZD
  • Fixed income: What's that, where are bunds? Getting over +60 basis points, just as we said they would from +56bp levels. The long US Treasury short bunds spread trade did quite well
  • Forex: USD continues. to face liquidation, as euro and sterling continue to spike higher and (as we’ve said from last weel) JPY joining the club
  • Commodities: USD being sold has led to a week of commodity partying for the bulls. Cotton is the only one really bucking the trend. NatGas +32% 1m
  • Equities: Peter G has highlighted that this year marked the best start of equities since 1988. The liftoff / momentum and blow-off top continues
  • S&P+7.5%, Nasdaq+9.8% NKY +4.1% Dax+3.3% EEM+10.5% MIB+9.2% HSI+10.8% AR +16.9% 
  • Volatilities: For now the low volatilities regime continues and will do so until either/and rates get much higher, global growth becomes uncertain. The cure for low volatility, is lower volatility

COT report

  • Forex: 23% increase in USD net shorts that takes us to a 14-week high. The EUR net-long reached a new record while GBP, the second most popular currency, saw its net-long reach at a 3-1/2 year high. The JPY remains the currency most vulnerable to short-covering
  • Commodities: The Natural Gas net-long jumped 24%. Gold was bought for a sixth week with the net-long reaching a four-month high. All Energy at record one-year highs. 

The week ahead

  • Key focus: US PCE / US nonfarm payrolls, Fed, Final PMIs, Australia's CPI
  • Central banks: (Singapore times): Fed +1.50%e/p (February 1, 0300) CL 2.50%e/p (February 2) NO 0.50%
  • Fed speakers: (SGT): Robert Kaplan (February 3, 0230), John Williams (February 3, 0430)
  • Other (Singapore times): Bank of England's Mark Carney (January 30, 2330) President Trump’s State of The Union speech (January 31, 2200)
Economy
  • US: PCE, personal spending/income, ADP, Chicago PMI, Job Cuts, ISM Manufacturing 59.0e 59.7p, Durable Orders, Factory Orders, non-farm payrolls +188,000 e 148,000 p, U/R 4.1%e
  • China: IP, Manufacturing PMI, non-manufacturing PMI, Caixin PMI
  • Eurozone: Q4 GDP +2.7%e 2.6%p, CPI 1.2%e 1.4%p CORE 1.0%e 0.9%p PMI Manufacturing. 59.6e/p
  • Japan: Jobs, RS, IP, PMI mfg. 54.4p
  • UK: Mortgage approvals 63.5k e 51.1k p, PMI Manufacturing 56.5e 56.3p
  • New Zealand: TB, Building permits AU: CPI 2.0%e 1.8%p, Private Sector Credit, Building Approvals, PPI

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 Ready to hike? Janet Yellen may announce a rate rise in her final meeting. Photo: Shutterstock

Thoughts on market positioning and sentiment

  • Very pivotal week: Trigger here seemed to be combination of where rates and the USD were staying, then Steve Mnuchin’s dovish comments on the US dollar caused quite a big leg up on a number of different asset classes. Saw gold rise above $1350/oz. Natural Gas has now risen by 30% over last month. The euro broke 1.25 (1.2427 last, range 1.2537 / 1.2214) Cable is above 1.40 (1.4160 last, range 1.4345 / 1.3857)
  • Huge reversal in AUDNZD after the big miss on New Zealand CPI - back up over 1.1000 (1.1034 last, range 1.1039 / 1.0857).
  • The European Central Bank was all about what the market wanted and less about anything said
  • Fed: This will be a copy paste statement meeting: all ‘legacy’ exit mode. Remember Powell takes over February 3, real first Fed meeting for 2018 is on March 22. His background is very different from his predecessors (which KVP thinks is a great thing). We still have three Fed seats (soon to be four) that need to be filled.
  • USD and USDJPY: The last bastion of the USD bulls, the weakest hand left on the table. Key break of ¥110 and then ¥109.50 last week. Broke ¥109 then came back above before closing at ¥108.58 for the week down 2%. Feels like ¥105 is a given (in days/weeks) and potentially a run for ¥103/¥100 before E1H. 
  • The Bank of Japan did not leave the market with the impression that a lot of quantitative easing or QT for that matter, was on the cards and really only next credible USD trigger will be the Fed March meeting.
  • US Affairs: Tariffs on washing machines (up to 50%) and solar panels (up to 30%) – all this is the dog barking on what is a midterm election year. Trump trying to look like he is delivering to his base.
  • Let’s get some context on this: For the solar panel industry, nearly all the jobs in the US in this space are created from installing the panels, not making them (ratio is like out of 260,000 workers, 2,000 are responsible for production). The Solar Energy Industries Association is fuming at these measures and estimates it will actually end up costing around 23,000 jobs. Again, this is the fine line of politics: structural facts and impacts of headline “wins”. Can expect a lot more of this type of window dressing from the administration and the Republicans. One thing is for sure, if the Democrats don’t educate voters there will be a big a contingent out there that will remember only the headlines – “Yeah, he’s tough and has our interests…. remember the tariffs against China on solar panels and washing machines?!” 
  • The ‘good’ news from any of this, is the tariffs and measures were among the least punitive of the menu – again underling the window dressing strategy.
  • Cryptos: Early days, looks like we are trying to base here. Still volatility could return post a recent hack of Japanese exchange CoinCheck (News out last Thursday/Friday), where $400mln seems to be missing.
Positioning

  • Tactical and Strategic Thoughts: Still like UST spreads vs. short bunds, German yield curve – we flagged the lag in bunds and said they’d get back to over 60bp, which is exactly what has happened over the last week. 
  • Still like the long Eurozone peripherals vs. short EZ core. Feel USDJPY can get to ¥105 relatively easy, top side now should be ¥110.50. Real test for euro is 1.30, with 1.25 being slight psychological bump. 
  • On equities, I’d keep longs, yet would pick up hedges given magnitude and speed of moves, i.e. we are more than 30% of total 2017 returns in the S&P in just the first four weeks of the year. For other equity indices we are well over +50% to +100% of total 2017 returns. 

Technical Outlook (James Kim)

  • Bitcoin: pennant consolidation phase. December highs to January needs to be broken to move higher.
  • DXY: Broke through neckline hits 200 monthly moving average low at 88.37. Potentially seeing low near term given end of week price action
  • EUR: Attempts 200 MMA too closes the week on the level needs to close above this for the month end. Would be huge bullish signal. But daily chart shows key reversal which indicates temporary peaks here with stops above last week’s high 1.2537. Target 1.23 in less than 30 days. This is seen as a temporary pull back.
  • GBPUSD: Breaks the key channel topside, however price action looks exhausted expect a pull back.
  • USDCAD: Positive divergence in momentum. This points to potential higher move in week ahead.
  • AUDUSD: trades at extremely important levels, either a bullish break out of a triple top formation at 0.8120.
  • AUDJPY: Selling at 89 handle, driven below short term trend line. AUDJPY trades below triple bottom.
  • AUDNZD: Positive outlook from last week validated, clears 2017 downtrend. Look for further move higher above 1.10.
  • US 10 years: Looks for a close below 2013-2016 support. Key to watch this month's close
  • USDJPY: Testing support from 2012 trendline and 2017 base. USDJPY may see a pullback in the recent selling.
  • Nikkei 225: three weeks of confusing weeks in Nikkei. Potential downside risks increased.
  • SPX: 3000 realistic target
  • Crude: positive price action but market extremely long.
  • XAU: Last week’s peak at 2016/2017 upper trendline. Price action looks like failing power of the rally. Short term retracement sell signal with stops above the high last week.

For more on forex, click here.

For this week's recording of the Macro Monday call click here.


– Edited by Gayle Bryant and Rob Ryan

Kay Van Petersen is Global Macro Strategist at Saxo Bank. You can follow him on Twitter: @SaxoStrats or @KVP_Macro. Please join us live for next Monday's Macro Call at 0830 [Singapore/Hong Kong], 0930 [Tokyo], 1130 [Sydney].
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Patto Patto
I clicked onto this story with great interest to see what justification Saxobank was giving for even the possibility of a 0.50% rate hike this week. Instead all the relevant text read was "This will be a copy paste statement meeting: all ‘legacy’ exit mode".. So the headline is misleading it seems, unless I have missed something........
1y
Jim Earls Jim Earls
The fact that their rates are not being increased by 25bps per meeting is a testament to trying to protect a hyper debt leveraged corner in these equity markets. Bad stuff-situation would have never came to this point under Volcker.
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Kay Van-Petersen Kay Van-Petersen
Patto, its actually a little out of character of me... i.e. it was not supposed to be click bait. But part of the a good trader is highlighting things that everyone does not expect to happen, so there will be literally no one out there that expects a hike... YET what if we did get one? So more playing devils advocate... With all that said... I think there is a small chance that she leaves a slightly hawkish legacy hedge... i.e. from her potential memories "Even back then I could see that things were heating up..."
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Kay Van-Petersen Kay Van-Petersen
Jim Earls, TGIM man. Totally, bring Volcker back... where are the central bankers of old... who did not care what the market thought of them & actually focused on the long-term rather than the next 50-100bp on the yield curve or the next -5% to -10% pullback in the S&P500....

Also lets bring Soros back.... & get some Macro traders who swing for it... rather than the flock of 2 & 20 mngers sitting on AUM...

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