October Jobs Report Strong: It Is Just One Report

On November 6 (Friday), jobs report for October had the winds of 120 miles per hour and blew everyone away. Non-farm payrolls showed 271,000 jobs were added in October, the most gain since December and a huge beatdown on expectations of about 185,000. It’s the best month for job growth so far this year. The report follows two consecutive months (August and September) of weak jobs growth below 160,000.

The total job gains for August and September were revised 12,000 higher. August was revised 17K higher to 153K from 136k, and September was revised -5K lower to 137K from 142K. Over the last 12 months, employment growth had averaged 230K per month, vs. 222K in the same-period of 2014. In 2014, average monthly payrolls was 260K. This year, it is 206K. Not only jobs gains for October were strong, but also unemployment and wages.

Total Non-Farm Payrolls – Monthly Net Change
Total Non-Farm Payrolls – Monthly Net Change

The unemployment rate dipped 0.1% to 5%, its lowest level since April 2008. Average hourly earnings rose by 9 cents an hour to $25.20. It rose 2.5% year-over-year (Y/Y), the best level since July 2009. For most of the “recovery”, wages has been flat. The increase in earnings is significant for two reasons. More money for employees means more spending (don’t forget debts), which accounts two-thirds of the economy. Second, wage growth might suggest that employers are having trouble finding new workers (should I say “skilled” workers) and they have to pay more to keep its workers and/or to get new skilled workers. This could draw more people back into the labor market, increasing the participation rate. Without the right skills, good luck.

Average Hourly Earnings and Average Weekly Hours
Average Hourly Earnings and Average Weekly Hours

The labor force participation rate remained unchanged at a 38-year (1977) low of 62.4%. The long-term decline in the participation rate is due to the aging of the baby-boom generation and loss of confidence in the jobs market. There hasn’t even been a rebound in participation rate of prime-age Americans (between the ages of 25 and 54).

Unemployment Rate + Labor Force Participation Rate

More than 122 million Americans had full-time jobs at the end of October, the highest since December 2007 (121.6 million).

Full-Time and Part-Time Employment

Immediately after the jobs report, the probability of a rate-hike in December lifted. Fed funds futures currently anticipates about 65% chance of a rate hike next month vs. about 72% immediately after the report and about 55% before the report.

Federal Reserve Chairwoman, Janet Yellen, lately has been saying that December’s Federal Open Market Committee (FOMC) meeting was “live” for a potential rate-hike. While this jobs report is positive, I believe it is too early to jump in on conclusions.

The policymakers should not be too quick to act on one report. In September, the Fed left rates unchanged mainly due to a low inflation. Inflation is still low and we will get a fresh look on Tuesday (November 17) when Consumer Price Index (CPI) is released.

In March, the Fed expressed worries about the strength of the U.S. Dollar, just after the greenback hit above $100 mark. The greenback then tumbled and has never recovered back to $100….yet.

US Dollar ("/DX" on thinkorswim platform) - Daily
US Dollar (“/DX” on thinkorswim platform) – Daily

Right after the jobs report, the dollar skyrocketed and was 40 cents away from hitting $100 mark. It’s currently at $98.88 and there is a very high chance it will go above $100 until December 15, the first day of FOMC meeting.

If the November job numbers does not surprise to the upside (released in December 4), inflation stays low, and the dollar keeps strengthening, I do not believe the Fed will hit the “launch” button for a rate-hike liftoff.

Market Reactions:

US Dollar ("/DX" on thinkorswim platform) - Hourly
US Dollar (“/DX” on thinkorswim platform) – Hourly
S&P 500 Index ("SPX" on thinkorswim platform) - Hourly
S&P 500 Index (“SPX” on thinkorswim platform) – Hourly

Central Banks Smash: No Growth, No Inflation

European Central Bank:

On October 22 (Thursday), European Central Bank (ECB) left rates unchanged, with interests on the main refinancing operations, marginal lending, and deposit rate at 0.05%, 0.30% and -0.20, respectively. But the press conference gave an interesting hint. Mario Draghi, the President of ECB, was most dovish as he could be, “work and assess” (unlike “wait and see” before).

The central bank is preparing to adjust “size, composition and duration” of its Quantitative Easing (QE) program at its December meeting, “the degree of monetary policy accommodation will need to be re-examined at our December monetary policy meeting”, Draghi said during the press conference. They are already delivering a massive stimulus to the euro area, following decisions taken between June 2014 and March 2015, to cut rates and introduce QE program. In September 2014, ECB cut its interest rate, or deposit rate to -0.20%, a record low. Its 1.1 trillion euros QE program got under way in March with purchases of 60 billion euros a month until at least September 2016.

When ECB cut deposit rate to record low in September 2014, Mr. Draghi blocked the entry to additional cuts, “we are at the lower bound, where technical adjustment are not going to be possible any longer.” (September 2014 press conference). Since then, growth hasn’t improved much and other central banks, such as Sweden and Switzerland, cut their interest rates into much lower territory. Now, another deposit rate-cut is back, “Further lowering of the deposit facility rate was indeed discussed.” Mr. Draghi said during the press conference.

The outlook for growth and inflation remains weak. Mr. Draghi – famous for his “whatever it takes” line – expressed “downside risks” to both economic growth and inflation, mainly from China and emerging markets.

Given the extent to which the central bank provided substantial amount of stimulus, the growth in the euro area has been disappointing. The euro area fell into deflation territory in September after a few months of low inflation. In September, annual inflation fell to 0.1% from 0.1% and 0.2% in August and July, respectively. Its biggest threat to the inflation is energy, which fell 8.9% in September, down from 7.2% and 5.6% in August and July, respectively.

Inflation Rate - Annual Percentage Change Source: Eurostat
Inflation Rate – Annual Percentage Change
Source: Eurostat

Europe’s economy will slow down due to export demand decreasing from China and emerging countries, where a quarter of all euro-zone exports gets shipped to.

As the ECB left the door open for more QE, Euro took a dive. Euro took a deeper dive when Mr. Draghi mentioned that deposit rate-cut was discussed. Deposit rate cut will also weaken the euro if implemented. After the press conference, the exchange rate is already pricing in a rate-cut. Mentions of deposit rate-cut and extra QE sent European markets higher and government bond yields fell across the board. The Euro Stoxx 50 index climbed 2.6%, as probability of more easy money increased. Swiss 10-year yield fell to fresh record low of -0.3% after the ECB press conference. 2-year Italian and Spanish yields went negative for the first time. 2-year German yield hit a record low of -0.32.

Regarding the exchange rate (EUR/USD), I expect it to hit a parity level by mid-February 2016.

As I stated in the previous posts, I expect more quantitative easing by ECB (and Bank of Japan also). I’m expecting ECB to increase its QE program to 85 billion euros a month and extend it until March 2017. When ECB decides to increase and extend the scope of its QE, I also expect deposit rate-cut of 10 basis points.

ECB will be meeting on December 3 when its quarterly forecasts for inflation and economic growth will be released. The only conflict with this meeting is that U.S. Federal Reserve policy makers meets two weeks later. ECB might hold off until the decision of the Fed, but the possibility of that is low.

EUR/USD Reaction:

EUR-USD - ECB Press Conference - Nov 1 2015
EUR/USD – Hourly Chart

U.S. Federal Reserve:

On October 28 (Wednesday), the Federal Reserve left rates unchanged. The bank was hawkish overall. It signaled that rate-hike is still on the table at its December meeting and dropped previous warnings about the events abroad that poses risks to the U.S. economy.

It does not make sense to drop “Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term.” (September statement) I’m sure the events abroad has its risks (spillover effect) to the U.S. economy and the Fed will keep an eye on them.

In its statement, it said the U.S. economy was expanding at a “moderate pace” as business capital investments and consumer spending rose at “solid rates”, but removed the following “…labor market continued to improve…” (September statement). The pace of job growth slowed, following weak jobs report in the past several months.

Let’s take a look at the comparison of the Fed statement from September to October, shall we?

Fed Statment Comparation - Sept. to Oct. Source: http://projects.wsj.com/fed-statement-tracker/
Fed Statment Comparation – Sept. to Oct.
Source: http://projects.wsj.com/fed-statement-tracker/

The Fed badly wants to raise rates this year, but conditions here and abroad does not support its mission. Next Federal Open Market Committee (FOMC) meeting takes place on December 15-16. By then, we will get important economic indicators including jobs report, Gross Domestic Product (GDP), retail spending and Consumer Price Index (CPI). If we don’t see any strong rebound, rate-hike is definitely off the table, including my prediction of 0.10% rate-hike for next month.

The report caused investors to increase the possibility of a rate increase in December. December rate-hike odds rose to almost 50% after the FOMC statement.

Greenback (US Dollar) Reaction:

U.S. Dollar ( "/DX" on thinkorswim platform) - Hourly Chart
U.S. Dollar ( “/DX” on thinkorswim platform) – Hourly Chart

 

Reserve Bank of New Zealand:

On October 28 (Wednesday), Reserve Bank of New Zealand (RBNZ) left rates unchanged at 2.75% after three consecutive rate-cuts since June. The central bank’s Governor Graeme Wheeler said that at present “it is appropriate to watch and wait.” “The prospects for slower growth in China and East Asia” remains a concern.

Housing market continues to pose financial stability risk. House price inflation is way higher. Median house prices are about nine times the average income. Short supply caused the house prices to increase significantly. “While residential building is accelerating, it will take some time to correct the supply shortfall.” RBNZ said in a statement. Auckland median home prices rose about 25.4% from September 2014 to September 2015, “House price inflation in Auckland remains strong, posing a financial stability risk.”

Further reduction in the Official Cash Rate (OCR) “seems likely” to ensure future CPI inflation settles near the middle of the target range (1 to 3%).

Although RBNZ left rates unchanged, Kiwi (NZD) fell because the central bank sent a dovish tone, “However, the exchange rate has been moving higher since September, which could, if sustained, dampen tradables sector activity and medium-term inflation. This would require a lower interest rate path than would otherwise be the case.” It’s a strong signal that RBNZ will cut rates to 2.5% if Kiwi continues to strengthening. I will be shorting Kiwi every time it strengthens.

“The sharp fall in dairy prices since early 2014 continues to weigh on domestic farm incomes…However, it is too early to say whether these recent improvements will be sustained.” RBNZ said in the statement. Low dairy prices caused RBNZ to cut rates. New Zealand exports of whole milk powder fell 58% in the first nine months of this year, compared with the same period in 2014. But, there’s a good news.

Recent Chinese announcement that it would abolish its one-child policy might just help increase dairy prices, as demand will increase. How? New Zealand is a major dairy exporter to China. Its milk powder and formula industry is likely to benefit from a baby boomlet in China.

NZD/USD Reactions:

NZD/USD - Hourly Chart
NZD/USD – Hourly Chart

 

Bank of Japan:

On October 30 (Friday), Bank of Japan (BoJ) maintained its monetary policy unchanged and downgraded its growth and inflation projections. BoJ left – by 8-1 majority vote – its QE program at current level of 80 trillion yen (about $660 billion) a year.

BoJ expects to hit its 2% inflation target in late 2016 or early 2017 vs. previous projection of mid-2016. Again and Again. This is the second time BoJ changed its target data. The last revision before this week was in April. It also lowered its growth projections for the current year by 0.5% to 1.2%.

They also lowered projections for Core-CPI, which excludes fresh food but includes energy. They lowered their forecasts for this fiscal year to 0.1%, down from a previous estimate of 0.7%. For the next fiscal year, they expect 1.4%, down from a previous estimate of 1.9%. Just like other central banks, BoJ acknowledged that falling energy prices were hitting them hard.

Low inflation, no economic growth, revisions, revisions, and revisions. Nothing is recovering in Japan.

Haruhiko Kuroda, the governor of BoJ, embarked on aggressive monetary easing in early 2013. So far he hasn’t had much success.

In the second quarter (April-June), Japan’s economy shrank at an annualized 1.2%. Housing spending declined 0.4% in September from 2.8% in August. Core-CPI declined for two straight months, falling 0.1% year-over-year both in September and August. Annual exports only rose 0.6% in September, slowest growth since August 2014, following 3.1% gain in August.

Exports are part of the calculation for Gross Domestic Product (GDP). Another decline in GDP would put Japan into recession, which could force BoJ to ease its monetary policy again. Another recession would be its fourth since the 2008 financial crisis and the second since Shinzo Abe (Abenomics), the Prime Minister of Japan, came to power in December 2012.

Its exports to China, Japan’s second-biggest market after the U.S., fell 3.5% in September. The third-quarter (July-September) GDP report will be released on November 16.

April 2014 sales tax (sales tax increased from 5% to 8%) increase only made things worse in Japan. It failed to boost inflation and weakened consumer sentiment.

In April 2013, BoJ expanded its QQE (or QE), buying financial assets worth 60-70 trillion yen a year, including Exchange Traded Funds (ETF).

QQE stands for Quantitative and Qualitative Easing. Qualitative easing targets certain assets to drive up their prices and drive down their yield, such as ETF. Quantitative Easing targets to drive down interest rates. Possibility of negative interest rates has been shot down by BoJ. But, why trust BoJ for their word? Actions speak louder than words.

In October 2014, BoJ increased the QQE to an annual purchases of 80 trillion yen. When is the next expansion? December?

Did you know that the BoJ owns 52% of Japan’s ETF market?

Japan's ETF Market - BoJ's holdings Source: Bloomberg
Japan’s ETF Market – BoJ’s holdings
Source: Bloomberg

For over a decade, BoJ’s aggressive monetary easing through asset purchases did not help Japan’s economy. Since 2001, the central bank operated 9 QEs and is currently operating its current 10th QE (or QQE). The extensions of its QE are beginning to become routine or the “new normal.”

Growth and prices are slowing in China, with no inflation in United Kingdom, Euro-zone, and the U.S. The chances that Japan will crawl out of deflation are very slim.

USD/JPY Reaction:

USD/JPY - Hourly Chart
USD/JPY – Hourly Chart

US Market Reactions (ECB and FOMC):

S&P 500 ("SPX") - Hourly Chart
S&P 500 (“SPX”) – Hourly Chart

 

Next week, both Reserve Bank of Australia (RBA) and Bank of England (BoE) will meet. Will be very interesting to watch.

Fed Will Hike The Rates By…(Hint: Not 0.25%)

Last Friday (September 4, 2015), non-farm payrolls AKA jobs report for August came out little bit stronger. 173,000 jobs were added in August and the unemployment rate decreased by 0.2% (5.3% in July) to 5.1% (The Fed considers unemployment rate of 5.0% to 5.2% as “full employment”), lowest since April 2008.

Employments numbers for June and July were revised higher. June was revised from 231K to 245K (+14K) and July was revised from 215K to 245K (+30K). With these revisions, employments gains in June and July were 44K higher than previously reported.

Total Non-Farm Payrolls - Monthly Net Change
Total Non-Farm Payrolls – Monthly Net Change

Average hourly earnings increased 8 cents or 0.32% (biggest rise in 7 months) to $25.09, a 2.2% gain from a year ago. The average work week increased 0.1 hour, to 34.6 hours. Increasing income will lead to increased spending (demand increases) which leads to increase in Consumer Price Index (CPI) (As demand increases, suppliers will increase the prices of goods and services) which then leads to an increase in inflation, getting closer to Fed’s 2% inflation target (or inflation rockets to the moon, damaging the economy).

Lower oil prices may be holding back wage increases, especially in the energy sector.

While average hourly earnings are slowly growing, recent “positive” changes in the minimum wages – higher minimum wages – will not help earnings/income, but will only mutilate the US economy. While the minimum wage increases may sound like a good thing, but it isn’t. When businesses are forced to pay higher wages to their workers, they may have to increase prices for their goods/services, leading to increase in inflation. Some businesses might lose their market share to low-paying businesses aboard. After businesses adjust their prices to offset wage increases, there’s no actual change in the “buying power” of consumers.

It’s better to let US companies make their own decisions regarding wages. Let the markets lead. Laissez-Faire.

The labor force participation did not move at all, at 62.6% for a third straight month.

So, unemployment decreased and labor force participation stayed unchanged. Here’s the dark side:

261K Americans dropped out of the labor force, pushing total US workers who are not in the labor force to a record of 94 million. The government only counts people as unemployed if they are actively looking for jobs. Those who dropped out of the labor force are not actively looking for jobs. Therefore, real unemployment rate can be and is much higher.

This report was the latest jobs report before the Federal Reserve meets this month to answer “million-dollar” question, rate-hike or not? The Fed will meet on September 16 and 17 to decide whether to raise interest rates for the first time since June 2006.

Rate-hike in June 2015? Well, that did not happen. Rate-hike in September 2015? Well, expectations for the rate-hike were lowered due to uncertainty about China and the health of global economy. But, Yes, there will be a rate-hike this month. No, not 0.25% (or 25 basis points). The Fed will raise the rates by…

…10 basis points or 0.10%…

0.10% is very reasonable.

On August 27, Preliminary (2nd estimate) Gross Domestic Product (GDP) showed that the US economy grew faster than initially thought in the second quarter. GDP expanded at 3.7% annualized rate instead of the previous estimate (advance estimate) of 2.3%.

This clearly shows a sharp acceleration in US economic growth momentum following a weak start in the year.

Personal Consumption Expenditures (PCE) (Consumer spending), which accounts for two-thirds of US economic activity, grew at a 3.1% in the second quarter following 1.8% growth in first quarter.

Real GDP and PCE- Quarterly % Change (2012 Q1 - 2015 Q2)
Real GDP and PCE- Quarterly % Change (2012 Q1 – 2015 Q2)

PCE price index (inflation measurement) increased at 2.2% annualized rate after declining by -1.9% in the first quarter. Core-PCE (excluding food and energy) increased at 1.8% annualized rate after increasing only 1.0% in the first quarter.

Further revisions for the second quarter are possible when the Department Of Commerce releases its final (third) GDP update on September 25.

Market reactions to the economic reports:

S&P 500 ("SPX") - 15 Min. Chart
S&P 500 (“SPX”) – 15 Min. Chart
US Dollar ("/DX") - Hourly Chart
US Dollar (“/DX”) – Hourly Chart

Canada Crisis: Second Rate-Cut Of The Year

On July 15 (Wednesday), Canada’s central bank AKA Bank of Canada (BoC) cut overnight rate by 25 basis points (bps) from 0.75% to 50%. This is the second rate-cut this year. First rate-cut took place in January. Not only rate-cut, but lower growth forecasts.

BoC expects Gross Domestic Product growth to be 1.1% year-over-year (Y/Y) this year, down from its 1.9% forecast in April. Policy makers said that Gross domestic product probably “contracted modestly” in the first half. However, they did not call it recession. ‘‘The lower outlook for Canadian growth has increased the downside risks to inflation,’’ policy makers said.

Bank also reduced the net exports contribution to GDP by 0.8% to 0.6% from 1.4%. A stronger U.S. economy and a weaker Canadian dollar should contribute to higher export growth.

Bank of Canada's July Forecasts. Source.
Bank of Canada’s July Forecasts (Page 14). Source.

There has been a big shift in the inflation tone over the past few months:

April: “Risks to the outlook for inflation are now roughly balanced”

May: “the Bank’s assessment of risks to the inflation profile has not materially changed”

This time (July): “The lower outlook for Canadian growth has increased the downside risks to inflation”

“The Bank anticipates that the economy will return to full capacity and inflation to 2 per cent on a sustained basis in the first half of 2017.” In the April’s forecasts, the bank expected the economy to return to full capacity at the end of 2016. I can tell that the Bank is running scared.

Damages from low oil prices has been extensive.  Canada is the world’s fifth-largest oil producer and lower oil prices will definitely not help the economy. The damages from lower oil prices shrank the economy in the first half of the year.

Recently after Iran deal has been reached, oil prices fell sharply. It’s currently trading around $48. If the the deal is finalized, it won’t be very good for Canada economy since Iran might want to double its oil production, leading to much lower oil prices.

The bank also said “Additional monetary stimulus is required at this time to help return the economy to full capacity and inflation sustainably to target.” If conditions get worse, they will cut rates again.

Oil is not the only problem for Canada. Other concerns are potential bubbles in housing and consumer debt.

According to BoC’s Monetary Policy Report (June), “the vulnerability associated with household indebtedness remains important and is expected to edge higher in the near term in response to the ongoing negative impact on incomes from the sharp decline in oil prices and a projected increase in the level of household debt.” (Page 30).

Over the past few years, housing prices in Canada have skyrocketed. Lower borrowing costs will just add fuel to the fire (DEBT + HIGH PRICES IN HOUSING MARKET WITH LOW INTEREST RATES = NOT A GOOD COMBINATION) . There just might be a bubble in the housing market. But, BoC does not think so.

The next BoC meeting is on September 9th, about a week before the U.S. Federal Reserve meeting, the day that many believe lift-off from the zero interest rate policy will take place. CPI and non-farm payrolls data for July and August will decide whatever the Fed will hike or not.

Rate-cuts and plunging commodity prices, especially crude oil, has caused sell-off in Loonie. Ever since the first rate-cut of the year (January), Loonie (CAD) has weakened significantly. With strengthening dollar (USD), USD/CAD has skyrocketed. When looked at monthly chart, USD/CAD has developed ‘Cup and Handle’ formation. While this is a sign to short USD/CAD, I would be very careful because fundamentals for CAD are too weak. If I were to short it, I would put my stop above the resistance line (Bold Red line).

USD/CAD - Monthly
USD/CAD – Monthly

 

Disappointing Jobs Report – Bye Bye July Rate-Hike

Last Thursday (July 2, 2015), non-farm payrolls report for June for disappointing. 223,000 jobs were added in June, vs expectations of 231,000, compared with an average monthly gain of 250,000 over the last 12 months. Although payrolls grew slightly, the unemployment rate ticked lower to 5.3% from 5.5%. While this may sound to be a good thing, it is not.

Unemployment rate fell due largely to a sharp decline in labor force participation, which fell by 0.3% point to 62.6%, the lowest level since October 1977. Decline in labor force participation shows more people were discouraged by the poor employment prospects that he/she is not actively seeking employments. Therefore, they are not reflected in the unemployment rate. Bottom line: they lost confidence in the jobs markets.

Revisions to the previous months’ job totals has been negative. April fell from 221,000 to 187,000 (-34,000) and May fell from 280,000 to 254,000 (-26,000), bringing losses of 60,000.

Total Non-Farm Payrolls – Monthly Net Change – 2014-Present
Total Non-Farm Payrolls – Monthly Net Change – 2014-Present

Job gains/loss:

Professional/Business services: +64,000. I believe it was largely due to college students who recently graduated or got a job while in school.

Health care: +40,000. ObamaCare continues to boost earnings for health care industry. Recently, health care stocks have been hitting all-time highs.

Retail: +33,000. Well it is summer, isn’t? It’s no wonder more jobs were added in retail.

Restaurants/Bars/etc: +30,000. One word, Summer.

Mining: -4,000. Oil decline has been hitting energy industry hard. Total decline in the industry now stands at 70,000.

While employment numbers are important to the Fed to justify the time to begin normalizing policy, I believe wage growth and Consumer Price Index (CPI) are more important. July rate-hike is off the table largely because wages remained flat. Average hourly earnings in the private sector stood at $24.95, unchanged from May and up 2% from a year earlier.

Average Hourly Earnings - 2014 to Present
Average Hourly Earnings – 2014 to Present

On July 17, CPI report for June will be released at 8:30 AM EST. It will be very important to watch for it. Any spending reports such as Retail Sales will also be important to watch out for because consumer spending makes up 70% of all economic activity. Retail sales account for one-third of it.

I strongly believe September rate liftoff is possible. If future CPI, average hourly earnings, and employment fall in any way, chance of liftoff in September will be reduced.

Following the release of the report on Thursday, US markets were mixed while US Dollar was down. US markers were closed due to 4th of July holiday. The United States is 239 years old.

Standard & Poor 500 ( “SPX” on ThinkorSwim platform) – Hourly
Standard & Poor 500 ( “SPX” on ThinkorSwim platform) – Hourly
US Dollar ( “/DX” on ThinkorSwim platform) – Hourly
US Dollar ( “/DX” on ThinkorSwim platform) – Hourly

 

Thank you for reading. If you have any questions, feel free to contact me. You can leave a comment and contact me on this website, google plus, twitter, and linkedin. Thank you.

SURPRISE!!! RBNZ cuts rates by 0.25%

Last Wednesday (June 10, 2015), Reserve Bank of New Zealand (RBNZ) cut the Official Cash Rate (OCR) by 0.25% (25 basis points) to 3.25% for the first time since March 2011. According to RBNZ, further easing may be needed if future economic data are weak (“We expect further easing may be appropriate. This will depend on the emerging data.”). They believe Kiwi (NZD) is overvalued and “…further significant downward adjustment is justified.”. I can tell that they badly want Kiwi to decline.

In 2014, RBNZ raised rates four times from 2.50% to 3.50% (March, April, June, July), before pausing further hikes due to price depreciation in oil and dairy.

RBNZ lowered interest rates to boost inflation as growth in New Zealand slows. They are responding to slowing growth as dairy prices fall and inflation is not showing any signs that it will increase. The inflation is near zero and the central bank wants it at 2%, same as other major countries. Consumer Price Index (CPI) inflation currently stands at 0.1%. Fonterra Cooperative Group ltd., the world’s biggest dairy exporter, is a New Zealand company and is responsible for about 30% of the world’s dairy exports. The average prices of dairy has been declining, reflecting on lower inflation. Lower cash rate should help support dairy farmers which will lead to more spending.

The central bank also changed its growth forecast. They see inflation reaching their target–2%–by 4th quarter of 2016, from previous forecast at 3rd quarter of 2017. Why do they think that they will reach their inflation target by the end of 2016? They believe lower rates combined with currency decline (NZD, or Kiwi) will speed up inflation. However, they cut Gross Domestic Product (GDP) forecast for next year from 3.8% to 3.3%.

Screenshot (18)
RBNZ’s GDP growth and CPI forecasts
Screenshot (20)
Real GDP growth projections – Annual

Housing prices in Auckland, New Zealand’s largest city, have increased significantly. Lower borrowing costs (lower rates) might cause housing bubble which can have devastating effect across the country. Graeme Wheeler, governor of RBNZ, said a lack of housing supply is the main cause of surging market prices.

Immediately after the release, NZD (Kiwi) came crushing down. Kiwi against the US Dollar (NZD/USD) fell almost 200 pips to 0.7017, lowest since September 2010. After the immediate drop, I closed my short on NZD/USD, taking almost 800 pips profit. The reason for the close? The pair did not close below the support level around 0.7025. During this kind of news, the pair should have easily closed below the support level. Unfortunately, it did not. Therefore, I closed my position. As of right now, it’s below the support level and I would go short again once it rebounds little bit (and technical analysis of course).

Another news that might support NZD/USD to go lower are positive US economic news and upcoming rate-hike, unless future US economic reports are negative and the tone of the Fed changes to raising the rate later on.

NZD/USD - Hourly
NZD/USD – Hourly

 

Feel free to leave your comments below and/or contact me on this website, twitter, and/or LinkedIn. Thank you.

Expectations for the Fed to raise rates ticked higher

Last Friday (May 22, 2015), U.S Consumer Price Index (CPI) report for April was released and it was in line with expectations. CPI increased a seasonally adjusted 0.1% in April and core-CPI (excludes food and energy) increased 0.3%, largest since January 2013. CPI reflects what people pay for goods and services. It’s an important indicator for inflation. The Federal Reserve watches inflation numbers closely, to determine the health of the US economy and whenever to raise interest rates.

CPI and Core-CPI (Jan 2014 - April 2015)
CPI and Core-CPI (Jan 2014 – April 2015)

Over the past 12-months, CPI declined 0.2% (biggest year-to-year drop since October 2009), largely due to the plunge in energy prices (energy index), which fell 19.4% over the last 12-months. However, core-CPI (which excludes food and energy, the violent categories) increased 1.8% over the last 12-months.

The positive inflation report may suggest that the Fed may not be that far away from raising interest rates. Stronger numbers gives a sense of relief that the US economy is pulling itself out of a slump that dragged growth down to 0.2% (GDP report previous post) in the first quarter of 2015. However, the inflation is far below the Fed’s 2% target.

The positive change in core prices was driven by rising costs for housing, medical care, furniture, and vehicles, while clothing and airfare prices declined. Fall in the oil prices led airplane companies to lower their airfares, to complete with competitors. I believe clothing and airfare prices will start to rise soon because summer is here. In the summer, people tend to travel more often (demand increases), pushing prices up. Oil has rebounded to the range of $60, as oil inventory decreases.

The dollar rose after the CPI report. The greenback (the dollar) gained almost 1%, rising to a highest price level since late-April. US markets were flat on Friday after both the Dow and the S&P 500 hit new records this week.

Dollar Index (/DX) - Hourly
Dollar Index (/DX) – Hourly

According to Federal Open Market Committee (FOMC) meeting minutes released last Wednesday (May 20, 2015), FOMC expects inflation to gradually rise as the labor market improves and transitory effects such as low oil prices fade away. They believed that there would not be enough information of overall health of US economy to start raising rates at their next meeting in June. The next policy meeting takes place on June 16 and June 17.

Chances of rate hike in June are very low, but the door is not closed. If the next non-farm payroll and Prelim GDP (Gross Domestic Product) (Friday, May 29, 2015) comes out very positive, the Fed will likely raise the rates. Prelim GDP is the second estimate of the last quarter. If you want to know more about the first GDP estimate of the last quarter, click here.

Last Friday (May 22, 2015), Federal Reserve Chairwoman Janet Yellen spoke about the US economic outlook at the Greater Providence Chamber of Commerce Economic Outlook in Rhode Island. She said that the Federal Reserve is on track to raise short-term interest rates this year, but will likely proceed slowly and cautiously.

As to trading, I would go long on the dollar and short EUR/USD. Why would I short EUR/USD? Recently, EUR/USD rebounded all the way to above 1.1450. As of right now, it’s around 1.1000. The recent rise in EUR/USD is an opportunity to go short.

News: First, I believe the U.S economy will rebound and future US economic reports will be positive, sending USD higher. Second, I believe Greece will default and eventually leave euro-zone (Greece exiting euro-zone is also known as “Grexit”), which will plunge Euro. Current Greece headlines are just background noises, until we know for sure that Greece will be staying or not.

Technical: If you look at 1-HOUR chart of EUR/USD, you can see that EUR/USD broke a strong support level that used to be resistance. If you look at WEEKLY chart of EUR/USD, you can see that there is a Bearish Engulfing Pattern. Technical seems to be bearish.

EUR/USD - Hourly
EUR/USD – Hourly
EUR/USD - Weekly
EUR/USD – Weekly

 

If you have any questions/comments, feel free to leave comments below and/or contact me by going to “Contact Me” box above. I can also be reached on twitter (@Khojinur30). Thank you.

Recap: Europe, Australia, United Kingdom, Canada, and The United States.

This week was full of financial news. I will be talking about some of them, which I consider too important to pass up. I will also give my views on them.

Europe:

Last Monday (March 2, 2015), a report showed that Consumer Price Index (CPI) Flash Estimate ticked up to -0.3% year-over-year from previous -0.6%. Markets were expecting -0.4. The data was little positive. However, It remained in negative territory for the third consecutive month. There are deflation in euro zone. The deflation might soon end later in the mid-year, as Quantitative Easing (QE) program starts this Monday (March 9, 2015).

Last Thursday (March 5, 2015), European Central Bank (ECB) kept the interest rates unchanged. During the press conference, the President of ECB, Draghi stated that the QE would start on March 9. ECB raised its projections for the euro area, “which foresee annual real GDP increasing by 1.5% in 2015, 1.9% in 2016 and 2.1% in 2017.” Remember that these are just projections and can change anytime. Plus, central banks are not right all the time. Mr. Draghi felt confident as he talked about the future of Euro zone. He believes Euro zone will greatly benefit from QE program and some areas already have since the announcement of QE last January.

This week, EUR/USD fell all the way to 1.0838, lowest level since September 2003, due to positive U.S jobs reports, Greece worries and QE program starting next week. I was already short on EUR/USD and I still believe it has a room to go further down.

EUR/USD Hourly
EUR/USD – Hourly

Australia: 

Last Monday (March 2, 2015), Reserve Bank of Australia (RBA) announced that they will leave the interest rate unchanged at 2.25%. In February meeting, RBA cut by 0.25%. This time, they did not. RBA is in “wait and see” mode, for now. I believe another rate cut is coming in the two meetings, depending on future economic reports. In the Monetary Policy Decision statement by RBA Governor, Glenn Stevens stated that the Australian dollar “remains above most estimates of its fundamental value…A lower exchange rate is likely to be needed to achieve balanced growth in the economy…Further easing of policy may be appropriate…”.  I believe RBA is open to further cuts and it will come in the next two meetings. However, positive economic reports might change that direction. As economics reports come out from Australia, we will have better sense of what RBA might do.

Last Monday (March 2, 2015), Building Approvals report came out and it was very positive. It was expected at -1.8%. It came out at whooping 7.9% up 10.7% from previous -2.8%. It shows that more buildings are being built. Thus, creating jobs. However, Building Approvals reports show that building approvals tend to jump around every month. If the report continues to be positive, it might convince RBA to keep the rate unchanged.

Last Tuesday (March 3, 2015), Gross Domestic Product (GDP) came at 0.5%, up only 0.1% from previous report (0.4%). It came out little bit weak from what was expected, 0.7%. It’s still very weak and it might have larger impact on RBA’s future actions. I believe RBA will cut because GDP is not improving much.

Last Wednesday (March 4, 2015), Retail Sales and Trade Balance reports came out from Australia. Retail sales came out at 0.4% as expected from previous 0.2%.  Trade balance on goods and services were a deficit of $980 million, an increase of $480 million from December 2014 ($500 million). All these numbers are in seasonally adjusted term. I believe the gap in Trade Balance from the last two reports might convince RBA little bit to cut the rate again.

I would be short on AUD. I believe it has the potential to go further down to 0.7500. The best pair would be to short AUD/USD (Positive U.S news and upcoming rate hike).

AUD/USD Hourly
AUD/USD – Hourly

United Kingdom: 

Last Thursday, Bank of England (BoE) kept the interest rate unchanged at 0.50% and Quantitative Easing (QE) programme at £375bn. In March 2009, the BoE’s Monetary Policy Committee (MPC) unanimously voted to cut the interest rate to 0.50% from 1.00% (-.50%). The interest rate still stays unchanged and QE stays steady, for now. If future economic reports such as wages, and inflation declines or comes out negative, rate cut might come. If it does not, rate hike might come sooner than expected. I believe it will get better and MPC will decide to raise the rate, sending Pound (GBP) higher.

This week, Pound (GBP) fell after rising last week, due to little negative news from UK and that BoE rejected higher rate for some time being because of concerns in oil prices and inflation. I would not trade GBP at this time. If I’m going to trade GBP, I would analyze its chart first. Did you notice that last week GBP/USD had-daily bearish engulfing pattern and this week there is-weekly bearish engulfing pattern?

GBP/USD - Daily
GBP/USD – Daily
GBP/USD - Weekly
GBP/USD – Weekly

Canada:

Last Tuesday (March 3, 2015), Canadian Gross Domestic Product (GDP) came out little positive at 0.3% from previous -0.2% on monthly basis. It was expected at 0.2%. On quarterly basis, it came out at 0.6% following 0.8% in third quarter.

Last Wednesday (March 4, 2015), Bank of Canada (BoC) left the interest rate unchanged at 0.75% following 0.25% cut last month. Ever since BoC cut the rate last month due to falling oil prices; oil prices has risen and been in $50 range. If oil price continue to fall, I believe they will cut the rate again. There is strong relationship between Canada and oil. As oil gets weaker, Loonie (CAD) gets weaker. Why? Canada is ranked 3rd globally in proved oil reserves. When making a trade decision on CAD, I would look at the oil prices. Of course, I would also look at news and technical. For example, if I want to trade USD/CAD, I would look at both U.S and Canada economic news (rate hike/cut, employment, etc) and technical on chart. If U.S economic news are strong, Canada economic news are weak and USD/CAD is just above strong support line, I would definitely go long on it. However, let’s say if USD/CAD is just below strong resistance line, I would wait for confirmation of a breakout and if the news are in my favor, I would go long.

Last Friday (March 6, 2015), Building Permits and Trade Balance reports were strongly negative. Building Permits came out at -12.9%, following 6.1% the previous month, expected of -4.2%. Trade balance on goods and services were a deficit of -2.5 billion, following -1.2 billion the previous month, expected of -0.9 billion. Both reports were negative, which sent CAD lower. At the same time, U.S non-farm payrolls came out strong, which sent USD higher. As a result, USD/CAD skyrocketed. The reports will definitely be on BoC committee’s mind. As of right now, I would be short on USD/CAD.

This week, USD/CAD was mixed as BoC kept the interest rate unchanged, after cutting it last month (negative for USD/CAD) and strong U.S jobs report (positive for USD/CAD). I would be short on it as I said in the last paragraph.

USD/CAD - Hourly
USD/CAD – Hourly

United States:

Last Friday (March 6, 2015), U.S jobs report came out very strong except the wages. Employment increased by 295,000 (Expected: 240k) and unemployment rate went down 0.2% to 5.5% (Expected: 5.6%). However, average hourly earning fell 0.1%, following 0.5% the previous month (Expected: 0.2%). But, that hourly wages part of the report did not stop U.S Dollar from rising. It was very positive for the U.S dollar because there is little higher chance of rate hike coming in the mid-year.

Since U.S economic news tends to have impact on global markets, here’s what happened; U.S Dollar rose, U.S stock fell, European stock rose, Euro dived, Gold prices fell and Treasury Yield jumped. EUR/USD fell to 1.0838, lowest level since September 2003. USD/JPY rose to 121.28, a two-month high.

So why did U.S stocks sold off? It sold off because of upcoming rate hike, which can be negative for equities, specifically for dividend stocks. As economy is getting better, it should help boost corporate profits. At the same time, strong dollar can hurt them. Rate hike can only make dollar even stronger.

In two weeks, the Fed will be meeting and I believe they might drop the “patient” in its March policy statement.

I would be long USD. The best pairs would be to short EUR/USD (Euro zone delfation, Greece crisis and QE program) and short NZD/USD (RBNZ keeps saying that NZD is too high and they will meeting next week, rate cut?) as I’m already short NZD/USD, and long USD/JPY (Upcoming U.S rate hike and extra stimulus BoJ might announce).

Dow Jones Industrial (DJI) - Hourly
Dow Jones Industrial (DJI) – Hourly
Nasdaq - Hourly
Nasdaq – Hourly
Standard & Poor 500 (S&P 500) - Hourly
Standard & Poor 500 (S&P 500) – Hourly
USD/JPY - Hourly
USD/JPY – Hourly
NZD/USD - Daily
NZD/USD – Daily

Follow my twitter account @Khojinur30 or just click twitter icon on the top right to be directed to my twitter account, for my views that are posted any time. Thank you.

Europe in Focus and its impact on the rest.

Earlier today, German CPI (Consumer Price Index) was released. It was weaker than expected. It’s the lowest since October, 2009. CPI is important for inflation. If it drops more (more likely will), deflation will be here both in Germany and spread to other Euro countries.

Japan is already in recession. Europe most likely will be next. It will spread to UK (United Kingdom). Japan, Europe and United Kingdom all have major impact on the economy of the US (United States). Therefore, United States might join the recession list. It’s like a domino effect. Everything starts from somewhere and spreads.

Greek crisis is worrisome. Greek may default and exit from Euro. Elections will be held 3 days after ECB, on Sunday, January 25, 2015.

On Thursday, January 22, 2015, ECB (European Central Bank) will release interest rates and there will be press conference. It will be closely watched as always. But this time, many are wondering if they will release QE (Quantitative Easing).

I believe ECB will delay QE because Greek elections are yet to be held. After the Greek elections, ECB will act on its next meeting.