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PM Bulletin: BOJ and the yen
31 May 2016
AM Bulletin: Quiet start following holiday weekend
31 May 2016
PM Bulletin: Meanwhile in China
27 May 2016
AM Bulletin: Yellen in focus ahead of holiday weekend
27 May 2016
PM Bulletin: FTSE breaks above 6,200 again
26 May 2016
Holiday Schedule: Memorial Day 30th May 2016
26 May 2016
AM Bulletin: Brent crude tops $50
26 May 2016
PM Bulletin : Crude Chart
25 May 2016
AM Bulletin: “Risk-on” trade continues
25 May 2016
PM Bulletin: Another poll boost for sterling
24 May 2016
AM Bulletin: Equities slip as rate hike worries persist
24 May 2016
PM Bulletin: Changing expectations
23 May 2016
Weekly Bulletin: I’ll see your hike and raise you two
23 May 2016
PM Bulletin : Significant events ahead of June FOMC
20 May 2016
AM Bulletin: Preparing for a summer rate hike
20 May 2016
PM Bulletin : Gold struggles as dollar strengthens
19 May 2016
AM Bulletin: FOMC more hawkish than anticipated
19 May 2016
PM Bulletin : FOMC minutes and the S&P
18 May 2016
AM Bulletin: FOMC minutes in focus
18 May 2016
PM Bulletin: Cable rallies on latest poll
17 May 2016
AM Bulletin: US equities lead bounce-back
17 May 2016
Weekly Bulletin : Waiting on Central Banks
13 May 2016
PM Bulletin : Apple
13 May 2016
Holiday Schedule Whit Monday Market Holiday
13 May 2016
AM Bulletin : US Retail Sales in focus
13 May 2016
PM Bulletin : Silver and Gold
12 May 2016
AM Bulletin: Investors wary after Wall Street sell-off
12 May 2016
PM Bulletin: Two headaches for Elon Musk
11 May 2016
AM Bulletin: Stock indices pull back after rally
11 May 2016
PM Bulletin: Yen pulls back on jawboning
10 May 2016
AM Bulletin: Markets steady on commodity bounce
10 May 2016
PM Bulletin: Precious metals give back recent gains
09 May 2016
Weekly Bulletin: Poor Non-Farm Payroll causes concern
09 May 2016
May: Non Farm Payrolls Out Today
06 May 2016
PM Bulletin: A dismal Non-Farm Payroll number
06 May 2016
AM Bulletin: Non-Farm Payrolls in focus
06 May 2016
PM Bulletin: Non-Farm Payroll look-ahead
05 May 2016
AM Bulletin: Crude bounce lifts equities
05 May 2016
PM Bulletin: Apple update
04 May 2016
AM Bulletin: Equities under pressure
04 May 2016
PM Bulletin: Aussie dollar slumps
03 May 2016
AM Bulletin: RBA cuts by 25 basis points
03 May 2016
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Economic Outlook
If last week showed us anything, it was what happens these days when investors are forced to make trading decisions in the vacuum between central bank meetings. Granted, there’s always stuff to react to: corporate earnings, economic data releases and, of course, comments from central bankers and policymakers. But in the current environment these tend to be treated as discreet events. There may be an instant negative reaction to a poor piece of data but this is often quickly reversed as investors assume central bankers will always be there to prop up asset prices. But when bad data hits the market as regularly as waves hit a cliff face eventually erosion takes place. If confidence gets undermined then pretty soon the technical picture starts to deteriorate as well. As the world’s major central banks don’t meet for over a month now that means there’s a danger of serious damage being done in the meantime.
Last week saw some disappointing earnings for the US retail sector (see below) although this was offset to some extent by a better-than-expected Retail Sales number on Friday. Core Retail Sales (excluding autos) came in at +0.8% for April – right at the top end of expectations and a sharp bounce-back following March’s disappointing increase of just 0.2% month-on-month. The number came as a real relief for investors as it rounded off a week which has brought a lot of pain for US retailers. Department store operators Macy’s and Nordstrom posted weak earnings and slashed their forward guidance for the rest of the year.
Otherwise, investors are still mulling the weak payroll data from earlier in the month. April Non-Farm Payrolls came in at 160,000 which was the lowest reading for seven months, and well below the consensus expectation. The Unemployment Rate came in at 5% which was in line with expectations and unchanged from the previous month. It remains at the lower end of the band for the “natural rate of employment” which is estimated to be somewhere between 4.7% and 5.8%.
Meanwhile, a number of Japanese policymakers popped up to assure investors that they were prepared to intervene to weaken the yen. This has become a serious issue ever since the Bank of Japan’s (BOJ) March meeting when the central bank held back from providing additional monetary stimulus. This decision has helped to keep a bid under the yen which is a disaster for Japan’s exporters as it makes their goods uncompetitive. It is also a problem for the Japanese government and the BOJ who are desperate to spark inflation in order to erode the country’s debt mountain. The BOJ meets in a month’s time and is widely expected to take further measures in an attempt to boost the economy. But before then there’s the danger that the yen will rally further. For now it appears that it’s only the threat of intervention that is keeping the USDJPY from falling back towards 100.00.
This week’s major economic releases include:
Monday- EUR Bank Holiday in Germany, France, Switzerland, German Bundesbank monthly report; USD Empire State Manufacturing Index, NAHB Housing Market Index, TIC Long-Term Purchases
Tuesday- AUD Monetary Policy Meeting Minutes, New Motor Vehicle Sales; JPY Revised Industrial Production; GBP CPI and RPI; EUR Trade Balance; CAD Manufacturing Sales; USD CPI, Building Permits, Housing Starts, Capacity Utilization Rate, Industrial Production
Wednesday- JPY Prelim GDP; AUD Wage Price Index; GBP Claimant Count Change, Average Earnings Index, Unemployment Rate; EUR CPI; USD Crude Oil Inventories, FOMC Meeting Minutes
Thursday- AUD Unemployment Rate; GBP Retail Sales; EUR ECB Monetary Policy Meeting Accounts; USD Unemployment Claims, Philly Fed Manufacturing Index, CB Leading Index, FOMC Member Dudley Speaks
Friday- EUR German PPI; GBP CBI Industrial Order Expectations; CAD CPI, Retail Sales; USD Existing Home Sales
Equities Outlook 
The US earnings season is really in the home straight now. As noted previously, for companies in the S&P 500 this is set to be the fourth consecutive quarter of year-over-year declines in earnings since the period running from the fourth quarter of 2008 through to the third quarter of 2009. It will also mark the fifth consecutive decline in sales.
Last week we had results in for a number of key retailers. On Wednesday Macy’s (M), the department store group which includes Bloomingdale’s, reported a weak set of numbers. Comparative store sales slumped 6.1% which was close to half what was expected. Sales for the first quarter of 2016 were down 7.4% when compared with the same period 12 months ago. The company reported continued weakness in consumer spending levels for clothing and related products. The biggest surprise was the company’s revised guidance for earnings per share. This was slashed to a range of $3.15 to $3.40 for the 2016 financial year from $3.80 to $3.90 previously. 
On Thursday Nordstrom (JWN) reported first quarter earnings per share of $0.26, well below the consensus estimate of $0.46. This was around a third of what the company earned last year despite revenues of $3.25 billion which was slightly under the $3.29 billion expected. Comparable sales fell 1.7% on estimates of an unchanged print. As with Macy’s the stock sold off sharply. And as with Macy’s this was mainly because the company slashed its earnings guidance for 2016. Nordstrom now expects only $2.50-$2.70 earnings per share, down from previous guidance of $3.10-$3.35. 
What is now starkly apparent is the stress being felt in much of the mainstream retail sector. Over the past few months a number of iconic US retailers such as Aeropostale, American Apparel, Caché, Eastern Mountain Sports, Pacific Sun, Quiksilver, Sports Authority and Wet Seal have all filed for bankruptcy. 
All of this goes to demonstrate the US consumer's unwillingness to spend money. This is particularly worrying as consumer spending is widely accepted as accounting for over 70% of all US economic activity. If the recent disappointing news on payrolls and jobless claims proves to be the start of a trend rather than a blip, then there could be worse to come.

Commodity/ FX Outlook
Last week WTI crude hit its highest level since early November 2015. Brent was also strong, equalling the multi-month highs reached at the end of April this year. Technically, both contracts are butting up against resistance. For Brent this comes in just under $48 per barrel which is around the 76.4% Fibonacci Retracement of the October 2015 – January 2016 sell-off. For WTI there’s some price clustering around $46. This is not a precise area of resistance but the area around $45-46 previously offered support in the first quarter of 2015. So much for the technical levels – such as they are. Looking at the price action over the past few weeks suggests that both contacts could just as easily be consolidating and getting set for another push higher as stalling and ready to fall.
Oil got support last week from a number of sources. These included supply disruptions caused by the Canadian wildfire around Fort McMurray, the capital of Canada’s oil sand fields, together with rebel violence in Nigeria and increased hostilities in Libya. There was also a bigger-than-expected drawdown in US inventories as reported by the Energy Information Administration. This showed a fall of 3.4 million barrels for the previous week compared with an expected build of 100,000 barrels. In addition, the latest monthly oil report from the International Energy Agency (IEA) said that there was growing evidence of a global rebalancing of supply and demand in the oil market. Supply was starting to look more measured while demand was resilient suggesting that the current oil glut could start to shrink later this year. 
What is interesting is how quickly equities turn lower every time crude oil sells off. I’m not quite sure what this tells us – probably more about the nervousness of stock market investors than anything else. One thing is certain and that is the close positive correlation between equities and oil – at current price levels. The simple reasons for this are firstly, the number of oil majors and other producers and explorers who benefit from a higher oil price and who are included in the major indices. To these we can add oil services companies and equipment manufacturers. Secondly, there are all those financial institutions who lent money to companies operating in US shale oil. There’s a ton of oil-related debt out there which needs to be serviced, and that can only happen when the oil price is high enough for shale producers to make a profit. That can’t happen at $30 per barrel, but it can at $50. Ultimately, high oil prices mean higher costs for everyone. But we’d probably need to see oil back above $80 for anyone to start worrying about that. Another angle to consider though is how quickly (and at what price) US shale companies could restart production. A number of insiders reckon that there are plenty who can make money at $50 per barrel. So that could mean that supply comes back on stream and provides a headwind for the oil price.
Precious metals investors (that is, those who buy and hold) were cheering last week after a couple if seriously important figures from the hedge fund world gave their backing to gold. Stanley Druckenmiller, founder of Duquesne Capital Management told the Sohn Investment Conference in New York that gold “is our largest currency allocation.”
Meanwhile, Paul Singer, who runs Elliott Management, wrote to clients telling them the gold rally was just beginning. It’s worth noting that Goldman Sachs takes the opposing view. 
Nevertheless, gold (and silver) ended lower for the second consecutive week. The sell-off in the two precious metals was really all down to the US dollar. The greenback is currently having a countertrend bounce following an 8% sell-off (against the basket of currencies in the Dollar Index) from the end of January to the beginning of this month. Now this recovery in the dollar can be put down to a combination of profit-taking, short-covering and a growing belief that the US Federal Reserve will hike rates next month. Perhaps more fairly it could be that investors expect the Fed to keep monetary policy steady but for the Bank of Japan and European Central Bank to ease further. Either way, numbers show that the short-dollar trade was getting crowded so it wasn’t going to take much for some of this to be wrung out. Time will tell if this rally in the dollar is the start of something bigger or if it’s close to exhaustion.
Having written all this it’s interesting to note that late on Friday both precious metals rallied along with the greenback. It just goes to show: correlations work brilliantly, until they don’t. The main point is that the zero/negative interest rate policies increasingly adopted around the world make owning precious metals very attractive. This is because gold and silver’s appeal increases in a world where negative interest rates become more widespread. When you have around $7 trillion-worth of government bonds trading with negative yields (in other words, you get back less than you invested) there’s no “lost opportunity” cost in holding gold even if it pays no interest. So while it’s true that a rate hike from the Fed would be likely to send precious metals lower, no hike is supportive. After all, that just means that there’s more pressure on other central banks to keep the downside pressure on rates and to keep adding monetary stimulus. 
Meanwhile, last week the World Gold Council (WGC) released its first quarter Gold Demand Trend Report. The WGC said that gold demand totalled 1,289 tonnes, an increase of 21% from the same time last year. The biggest factor behind this rise was a resurgence of global investment demand, specifically in exchange-traded funds. The report highlighted that ETFs saw inflows of 363.7 tonnes, more than reversing the total outflows seen in 2014 and 2015.


The US dollar ended last week in fine style, putting in a sharp rally following a strong Retail Sales number. The thinking behind this, of course, is that a good piece of data increases the likelihood of the Federal Reserve hiking rates again when it meets next month. Now, there’s no doubt that US retail sales are important. After all, consumer consumption is widely believed to account for over 70% of all US economic activity. There’s also no doubt that it was a good report. Core Retail Sales (excluding autos) rose +0.8% in April, well above the +0.4% reading for March (revised up from +0.2%) and right at the top end of expectations. Headline Retail sales was even better, surging 1.3% last month after a decline of 0.3% previously. In addition, what had been a very quiet week for data rounded off with a strong Consumer Sentiment reading and an increase in Business Inventories. However, rising inventories isn’t always a good sign. It can mean that wholesalers are having trouble shifting stock. Consumer Sentiment has a strong positive correlation to the stock market so is pretty meaningless.
In contrast, we’ve had a string of weak data releases recently including GDP, Durable Goods, Manufacturing, Non-Farm Payrolls and Jobless Claims. On top of that retailers such as Macy’s and Nordstrom have been particularly downbeat about the outlook while generally corporate earnings and revenues continue to trend downwards. So, it could be that this retail sales number indicates that the US economy is set to bounce back, or it could be an outlier. Either way, it is pretty daft to think that a single data release will push a very nervous Fed in to another rate hike – just look what happened after the last one. But for now the dollar as rallying and is being helped along by various Fed members whose job it is to keep open the possibility of a June rate hike. 
At the end of last week we heard from Federal Reserve Bank of Boston President Eric Rosengren and Federal Reserve Bank of Kansas City President Esther George who were both fairly hawkish. Mr Rosengren said that current market pricing implied a view of the US economy which was too pessimistic. Similarly, Ms George said that rates were ‘too low for today’s economic conditions’. As far as the market is concerned, the probability of a rate hike in June is around 4% - which effectively means no chance at all.


Posted by David Morrison

Category: Weekly Bulletin

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