Here we go again; central bank meetings and more earnings from the US. US housing starts jumped 16% on Friday in a positive sign for the US consumer and a sign that low interest rates might be working too well. Trading was light on Monday largely because of the MLK holiday in the US. Gold leads all currencies, holding partly to gains after US inde futures bounce from Asia lows. The CFTC positioning data showed US dollar longs cutting back again. As speculation mounts ahead of this week's BoE and ECB monetary policy decisions, Ashraf posted the chart below, which he says is foretelling a major move in 2020.
The jump in US housing starts to 1608K from 1380K was the biggest one-month gain since October 2016. One caveat to the rise was unseasonably warm weather, which may have artificially increased activity but in the bigger picture, starts have been strong since August.
From a global perspective, US housing is still relatively cheap in part due to the overhang from the crisis, but the scars are beginning to fade and low rates remain steroids for home buying. In addition, home builders have been scaling down to lower-priced homes to capture high demand in that segment. That trend could help to boost activity in 2020 while higher housing prices could spark a wealth effect.
The jump is a reminder that US risks are more two-sided than they were in 2020. If manufacturing and trade-related sectors get a bump from the phase-one trade deal or if business investment picks up, the Fed could be facing questions about inflation.
CFTC Commitments of TradersSpeculative net futures trader positions as of the close on Tuesday. Net short denoted by - long by +.
EUR -48K vs -61K prior GBP +31K vs +17K prior JPY -31K vs -12K prior CHF flat vs -4K prior CAD +33K vs +26K prior AUD -20K vs -27K prior NZD flat vs -1K prior
The overall the US remains firmly in a net-long position but it's at the weakest since June 2018.
You probably had your fill of "2020 themes", so why not another? The one spot to watch for a jolt to global growth in ... China. The US-China trade deal removes a major worry for Beijing, which may take action as soon as early next week to enact some stimulus ahead of a week of holidays starting on Jan 24. Officials strongly hinted that another RRR rate cut isn't coming, but they are expected to cut the loan prime rate soon and may take additional stimulus measures on the fiscal side. That would be powerful -- and if they do, I see bright days ahead for the Australian, Canadian and New Zealand dollars.
Inflation watchA pair of US inflation reports this week were on the low side of expectations but there is a clear trend higher in core measures and wage growth (to a lesser extent). The Fed has confined itself to the sidelines but there is life in inflation. Heading into next month, we roll over some tough comps and that sets a lower bar. I think there's a chance that at some point this year, inflation is a major theme in markets and that sparks talks about central bank hiking.
HousingCentral banks haven't been able to spark broad based inflation, but they've been remarkably successful at creating asset inflation. With all the rate cuts last year, an underrated risk is a surprise rise in house prices globally. We're already starting to see signs of tighter market in New Zealand which just posted a 12% rise in house prices. Thursday's home builder sentiment numbers in the US were a bit stronger as well.
OilUS shale oil is not what it appears to be. Every budget that comes out points to less spending this year and the market is laser-focused on return of capital rather than production expansion. Natural gas is worthless in many parts of the US and is being burned off at unprecedented rates. On top of that, the risks for the US election are higher in energy than anywhere else. The market is overly comfortable around $60 but a fall below $50 would create a real reckoning in shale and that has a multitude of knock-on effects, particularly in junk bond.
IranA week ago we were on the brink of war and now the world has forgotten about Iran. Geopolitics are impossible to price in. You can't price in half-a-war. The thinking now is everyone got to flex their muscles, but a report on Friday said that 11 US soldiers were concussed in one of the blasts. That puts to bed the theory that Iran was knowingly dropping bombs that wouldn't hurt anyone (assuming the report was true). The chance of Iran or Iran-sponsored militias launching attacks remains high and the situation could quickly spin out of control from them.
US electionThe election is the one risk that everyone can point to and it's undeniable. The world will change on Nov 3 but it's a binary risk and that's tough to price in. At some point there will be a pre-election de-risking but it's tough to say whether that comes in the autumn or sooner. The following remains valid...so far: Trump is staying in the White House as long as a recession or a stock market crash are ruled out.
The much anticipated US retail sales report exceeded expectations for December and helped bolster risk appetite mainly for US indices (not European), especially as the US & China formalised round 1 of the trade deal. For 2019, US retail sales rose 3.6%, down from 5.0% in 2018. More on this below. Despite growing expectations for BoE rate cut later this month, GBP is the strongest currency of the day. A new trade action/adjustment has been issued to Premium subscribers.
The phase one US-China trade deal inspired a mild 'sell the fact' type trade but the market largely ignored it. The details of massive pledged purchases of US goods and services had leaked and none of the details were surprising.
US Consumers' Holiday PushThe "Control Group" retail sales series, mostly watched for economists as it excludes food services, car dealers and building materials to give a more accurate sense of demand, rose 0.5% vs exp 0.4%. The overall report was a vital positive surorise after retail giants Target, JC Penney and Koh's reported weak sales and dire guidance.
The "Dept Store vs Consumers" argument shall remain for the remainder of the year. After all, Target is a company whose share price had doubled since January 2019, and was expected to report sales growth upwards of 4%. Company shares fell 7% but the bigger concern is that the US consumer isn't as healthy as believed.
The Beige Book also looked at the consumer and said that overall sales were solid but regional commentary showed a mixed picture. Cleveland, KC and Dallas regions were upbeat but New York and St Louis were more pessimistic.
A bigger question is whether that and a 2% growth outlook for this year justifies the elevated mood in markets. The Beige Book survey was mostly after the phase one handshake deal but there weren't any clear signs of an improvement in the mood. Further reason for concern came from aluminum giant Alcoa. In October the company predicted demand growth in 2020 “would come roaring back” after a decline in 2019 but now forecasts just a 1.4-2.4% rise this year. The company is a decent bellwether for industrial sentiment.
US December CPI was lighter than expected and that helped to stall the dollar rally. The Swiss franc was the top performer while the New Zealand dollar lagged. UK Dec CPI came in weaker than expected but cable manages to regain 1.30 as USD is sold across the board. Trump added some important reminders with regards to the conditions to the US-China trade deal. More on retail woes below. US PPI and Empire manufacturing are due today, followed by the Fed's Beige. A new trade was issued yesterday, while the Premium Video (5 Trading Points) is posted below for subscribers. There are currently 8 trades open in FX, indices, commodities and crypto.
On Tuesday, US CPI rose 2.3% in December compared to 2.4% expected and the same report showed flat year-over-year weekly earnings growth versus the +0.8% consensus. The dollar sagged after the release and that gave an opening for retracements in the euro and pound.
USD/JPY also stalled at 110. Further selling came on a report saying that the US hadn't agreed to reduce further tariffs in the phase one deal until at least after the election. That sparked some risk off sentiment but it shouldn't have been a surprise. The US already reduced the autumn tariffs when it announced the deal and there were no rumours or expectations of further cuts. Later, Mnuchin said they would review tariffs after a phase 2 deal was signed.
The main risk in the day ahead is a sell-the-fact on the deal signing. However it's almost too-obvious of a risk to materialize. Still, the runaway moves in momentum stocks have us wary.
If there is to be a reckoning it will come on the economic side. The big picture theme for early 2020 is monitoring how businesses investment responds to news of a phase one trade deal. While the deal will be signed on Wednesday, it was announced Dec 13 and that bump should begin to materialize soon. If so, early signs may show up in Wednesday's Beige Book report. It's due out at 1900 GMT and given all the good news that's been priced into markets in the past two months, it's imperative that some positive economic momentum begins to materialize early in 2020 and this release is a good place to start.
Back to Retail ConcernsThere are also rumblings about a poor US retail sales report due Thursday, in light of shocking guidance by retailing giant Target. Ashraf mentioned to watch 2 things: the VVIX relative to the VIX, even as the latter remains below 13.0. And, the flattening of the US yield curve as the yield spread between 10 and 2 year yields drops to 22.9.