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This read on inflation is at 7:30 am CT on Monday. This is our number one event this week because it can ultimately lay the groundwork for what the Federal Reserve communicates at its policy meeting on Wednesday. Though there is less than a 5% chance the Fed will hike, a very strong read will surely spark speculation. PCE is the Fed’s preferred inflation indicator and the only guarantee is that a stronger or weaker read will encourage volatility in everything from the Dollar and Treasuries to commodities as traders try to front-run the Fed. A better read is supposed to strengthen the Dollar and weaken the Treasury complex while a weaker read will do the opposite.
The Fed begins its two-day policy meeting on Tuesday and concludes Wednesday at 1:00 pm CT with a policy decision and statement. Fed chairwoman Janet Yellen is still at the helm and will remain there through February 3rd. Her successor, Jerome Powell was confirmed by the Senate last week. There is no press conference after this meeting and right now there is less than a 5% chance that the Fed will hike. As mentioned above, Monday’s PCE Index read should play a critical role in the Fed’s policy verbiage. The Dollar Index has already lost more than 3% this year while the S&P has gained more than 7%. The missing piece is inflation which essentially encouraged a dovish hike in December where two members dissented for the first time. The Fed is expected to hike rates at their meeting in March but make no mistake, the case could easily be made for action on Wednesday. With the Euro at the highest level since December 2014. The ECB expressed concern at their meeting Thursday that a rising currency could slow growth and inflation in the region. The Dollar is now the most oversold on the weekly since November 2007. Furthermore, traders expanded the already record long position in the Euro by 25% in the week ending January 23rd. We have written about this currency move and have consistently expressed a long-term bearish bias in the Dollar and a long-term bullish bias in the Euro. This has not changed for the long-term. However, considering the aforementioned facts, a hawkish surprise which would strengthen the Dollar, could be in the cards.
January employment data is due out Friday at 7:30 am CT. While inflation remains the key laggard in this recovery, wage growth is also mentioned in that argument. The headline read is job growth (expected +184,000) and unemployment rate (U3 at 4.1%) but as the economy heads closer to full employment, Average Hourly Earnings and the U6 unemployment rate (includes part-time workers at 8.1%) becomes more and more important. We will be watching these number very closely and while an argument can be made for traction in wage growth in three out of the last four months, the U6 unemployment rate has risen for two months in a row. The week opens with inflation which leads into the Fed meeting, but Nonfarm Payroll will bring the grand finale.
Tuesday evening President Trump will give his first State of the Union address to Congress as sitting President. Last year he addressed congress on the evening of February 28th and a calm and collected tone helped send the S&P up more than 1.5% that evening to a high of 2401. Though the S&P is up about 20% since that day, the market did not close out above 2401 until May 24th. In fact, that March 1st session high actually brought the deepest correction we have seen since the election, 3.5%. With the Fed meeting on Wednesday, it is a proven fact that the S&P tends to trade higher on Tuesdays and early in Wednesday’s session in what is known as the Fed Drift. Lastly, this is a tumultuous week for earnings with Facebook due out Tuesday after the bell and Apple, Alphabet and Amazon all due out Thursday after the bell. We have been unwaveringly bullish in the S&P (other than the last week of the year). However, if there were ever a time to see a short-term top in this run, a time in which all the buyers have finally bought, it is through this news this week.
This is a huge week domestically, but we must not overlook data from the rest of the world. Last week the ECB left policy unchanged and expressed a concern that the rise in the Euro would slow growth and inflation. The Euro barely traded below 1.20 for a cup of coffee in the month of January. On Thursday it traded to 1.25765, the highest level since December 2014 before retreating through Friday. The Eurozone has GDP data Tuesday, CPI Wednesday and Manufacturing Thursday. Tuesday night is key for the far east with CPI data from Australia and Manufacturing PMI out of China. The Aussie Dollar extended gains on Friday to the highest level since May 2015 but closed just below its September 2017 high. These reads on Tuesday night as well as the private Caixin Chinese Manufacturing read Wednesday and Aussie PPI Thursday will play a key role in the Aussie Dollar trade.
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