FOMC – Rate Rise?

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BarroMetrics Views: FOMC – Rate Rise?

Well, folks, it’s here: Thursday morning 2:00 am (HK time, 2:00 PM EST), the FOMC rate decision will be in.

Figure 1 shows the S&P (cash, daily). Following some suggestions of a Fed hike in September, On September 9, the S&P moved down 41 points – up from the average ATR of 12.7 points since the breakout on July 7. But, on Monday, Sept 12, it rallied with a range of 44 points.

Since then it has been moving sideways, bounded by 2169 and 2119.

There are two reasons why I doubt we’ll see a rate rise.

Firstly, at this moment, the US stock market is totally divorced from what’s happening in the US economy. Take the job front.

Figure 2 shows ShadowStats’s Unemployment calculations. You’ll see that while the SS number is flat, the official numbers are declining. In this scenario, I see Yellen, aware of the true situation, unlikely to raise rates until after the US elections. And this brings me to the second point.

Historically, the FED has usually raised rates until after the election results. For example see: “September rate hike would break Fed tradition during election year“.

If the FED fails to raise rates, we should see a rally in the S&P. The nature of that rally will shed light on whether the bull market is likely to continue.

2016-09-21_08-36-23-sp-d

FIGURE 1 S&P Daily

2016-09-21_08-53-05-shadow-stats

FIGURE 2 ShadowStats Unemployment

Stalking

Bengal tiger stalking, Panthera tigris tigris, Western Ghats, India
Bengal tiger stalking, Panthera tigris tigris, Western Ghats, India

BarroMetrics Views: Stalking

Currently, I am stalking a short trade in the GBPUSD. The question at the back of my mind is whether the setup will complete before FOMC on September 21 (EST). The reason I have that question is: I doubt the FED will raise rates so there should be, at least, a knee-jerk rally for the GBP. Not a great scenario for shorts.

That said, I thought I’d share some of my thoughts on the subject.

Figure 1 is the cash futures for the GBPUSD going back to inception. We see that it recently broke out of a range that began in 1985. Currently, it appears to in a retest, consolidation phase. Is the retest complete?

Figure 02 seeks to answer that question. I am using the 290-min chart instead of the daily, to show the detail better. It shows that the GBP hit the Primary Sell Zone and sold off. Normally, I’d have been looking to sell in that zone. But not this time. Note:

Figure 3 shows why. You want to note:

  • The swing up began off 1.2864 on Aug 2015 as part of the congestion structure that began on July 16.
  • The sloping black and red lines are the linear regression bands I use to measure momentum.
  • The first red arrow shows that:
  1. The current high (to the top of the Primary Sell Zone) occurred on 09-06. It had at least equal momentum to the high marked by the blue arrow.
  2. For this reason, I chose not to short the pair because I am looking for a new high or at least a retest of Sept 6 high.
  • The black and red lines show my preferred price action before the retest of the high. Ideally, the GBP will drop to the Value Area High (Blue line and light green rectangle) before rallying.
  • The second red arrow shows the earliest date for the new high if we are to see momentum divergence.
  • The exercise shows that if I am to see momentum divergence, the new high needs to occur around Sept 13 or later.
  • However, unless I have at least 5 trading days before FOMC, I’ll wait for the decision before seeking to enter.

2016-09-08_06-11-56-gbpusd-01-12m-futures

FIGURE 01 GBP (monthly)

Chart through the courtesy of Chart Store.

2016-09-08_06-09-41-gbpusd-02-290-min

FIGURE 02 290-min GBPUSD

Chart through the courtesy of Market Analyst

2016-09-08_06-19-43_-png-gbpusd-03-60-min

FIGURE 02 60-min GBPUSD

 

 

Non-Farm and Rate Hike

BarroMetrics Views: Non-Farm and Rate Hike

Tonight we have Non-Farm at 8:30 EST. It has a direct bearing on whether the FED will raise rates in September. My view is it would prefer to raise them after the elections (Nov 8). For this reason, I expect the number tonight to be at the lower end of the consensus range. If I am correct

If I am correct, the FED can delay raising rates in September and pass the buck to the December meeting (Dec 13 & 14). The November meeting is schedules ahead of the elections (Nov 1 & 2).

What about economic reasons, rather than FED desires, for raising or not raising rates?

Attached are articles from Larry Levin, Seeking Alpha and Wealth Daily. Links to the sites are the bottom of the page. You’ll see some of the arguments for both sides.

Good luck tonight with Non-Farm trading!

2016-09-02 Why Fed Raise Rates Sept SeekingAlpha

2016-09-02 Levin Rate Hike

2016-09-02 Rate Hike

Brexit?

BarroMetrics Views: Brexit?

Today, the Markit/CIPS purchasing managers’ index for the sector moved up to 53.3 from July’s figure of 48.3. This data is on the back of previous stronger than expected employment and CPI.

Figure 1 shows the 15-min GBPUSD chart. Notice the gap that occurred just after the news.  Figure 2 shows the rally within the backdrop of the sideways price action since July 6. Notice that today’s action retraces the down move following Yellen’s August 27 comments.

For me, the price action sets up the GBPUSD for a high reward short. If we don’t see a retracement down tonight, we have weak longs in the market – any Non-Farm number better than consensus will cause nervous longs to exit and thus causing the current up move to reverse.

Of course, the reverse is also true. A Non-Farm number below consensus will be accompanied by more upside.

Tomorrow I’ll have supporting arguments and contra-rise for a rate rise. The next test on the horizon for the USD.

2016-09-01 GBPUSD 15-min

FIGURE 1 15-min GBPUSD

2016-09-01 GBPUSD 290-min

FIGURE 2 290-min GBPUSD

Raise or Not Raise?

BarroMetrics Views: Raise or Not Raise?

The USD spiked against the commonly traded pairs on Friday, August 26 after Yellen said:

“In light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal-funds rate has strengthened in recent months.”

Note that she did not say that rates would rise in September. Indeed, reading her speech, I could not find one iota of new information on the timing of the rate rise. Essentially she said:

Rates will rise if warranted by the data. At this point, the data suggests it could be possible rates at some stage“.

And so, we come to Friday’s Non-Farm. Consensus expectations range is around the 175k to 180k with the range at 125K to 215K (last month 255K).

If the figure comes our around 200k or more, there will be pressure on the FED to raise rates in September (if only for the sake of its credibility). Such a number will probably lead to a sharp rise in the USD and fall in the US stock market.

It’s unlikely that the FED will welcome this sort of ‘rate-rise’ pressure. It wants to raise rates so as to be in a position to lower them when the next recession hits. Also, it probably does not want to raise rates ahead of the election results. The Nov 1-2 meeting would be the ideal time (There is no meeting in October).

Long-term readers know that I see the employment stats as tending to reflect FED preferences. For this reason, I see Non-Farm coming at the consensus or the lower range of the consensus range. Such a result would allow the FED to bypass a September rate rise.

How would a consensus number (or a number at the low end of the consensus range) impact the USD and S&P? I’d expect that for Friday, the effect would be for the USD to decline and S&P rally. We may see the USD give up all the gains it made post-Yellen Jackson Hole.

Will I position myself ahead of the number? Nope. But, I will look to trade the GBPUSD and AUDUSD if numbers come out at the extreme of the consensus range.

Black Swan

BarroMetrics Views: A Black Swan

Sometime in October or November, Italy will be going to the polls on a referendum called by Renzi. The referendum is for Renzi’s structural constitutional reforms. If the referendum succeeds, he’ll be free to carry out what appears to be much needed economic changes. If it fails, Renzi will step down – at least he has promised to do so. And, if he resigns, we may well see a parliamentary election that leads to Italy leaving the EU.

Unlike the UK, Italian participation in the EU is key to EU’s continuation. It is one of the core members and the third biggest economy. An Italian departure would lead to a break-up of the community.

What are the chances of Renzi losing the referendum? The polls suggest it is too close to call. And unlike the UK, I don’t follow Italian matters closely – so I have no personal assessment to rely on.

What I do know if there is a populist party, the 5-Star Movement, which has promised to withdraw from the Euro Zone if elected. It has won mayoral elections in Rome and Turin and is running even-stevens with Renzi’s PD party in the polls.

A loss to the 5-Star Movement under current conditions may well be the Black Swan that will bring about a decline in world stock markets.

We’ll see.

 

 

Whither the Summer Hols?

BarroMetrics Views: Whither the Summer Hols?

The doldrums should come to an end with most US schools returning towards the end of August. Moreover, the Non-Farm Payrolls are due on September 2. Given the conflicting views expressed by the FED chiefs on the US interest rise, the Non-Farm will be an important guide to the September FED meeting outcome.

Figure 1 shows that the S&P is at an inflexion point. A bullish-conviction bar close above 2242 will return me back to the 2009 strategy: long or out. A bearish conviction close below 2101 provides an Upthrust Change in Trend of a quarterly magnitude.

2016-08-24_18-15-42 S&P

FIGURE 1 13w S&P Cash

 

 

Thank Goodness for the Cable

BarroMetrics Views: Thank Goodness for the Cable

August is traditionality a tough month for traders. With the US summer school holidays, come light volumes, and directionless trading. This year GBP came to the rescue. Courtesy of Brexit, we have seen a strong downtrend develop.

Today the continuation of the trend will be either confirmed or rejected at 16:30 HK with the release of the UK employment numbers – expected to come in unchanged (4.9%) from last month.

Yesterday’s CPI led to a strengthening of the GBP when it came in at 6% rather than 5%. Pundits expressed surprise at the slight higher number. I don’t know why. In my view, Carney had telegraphed the inflation number when he told us that the BOE would continue with QE even in the face of higher inflation numbers.

I also believe that his comment also implied that the other measures of the UK economy would be worse than normal.

Yesterday’s rally allows a shorting opportunity. With expectations of an unchanged number, the GBP ought to give back the gains it following the CPI  – at least until 2:00 am Thursday (HK time) or 2:00 PM EST when the FOMC minutes are released.

I expect the minutes to show bearish inclination to raising rates. If so, we may see the GBP rally. The structure of the rally will indicate whether or not we have another longer-term shorting opportunity. I’ll cover that tomorrow.

While shorting the GBP (I prefer the GBPUSD pair) is strategically easy; tactically it is less so because it involves a time window between 4:30 PM Wednesday (HK time) to around 1:00 am Thursday (HK time). Given the time window, we’d need to take a position ahead of the number. Executing this entails additional risk.

I’d cope with the risk by taking a position size of no larger than half normal size and seeking to cover if the number comes in better than expected or within expectations.

The target would be around 1.2877 or exiting at 1:00 am, Thursday  (HK Time).

 

Fed Rate Rise September?

BarroMetrics Views: Fed Rate Rise September?

On August 3, Jerome Powell gave some interesting comments at the Brooking Institution conference.

Powell is a member of the Federal Reserve Board of Governors. He told the Finanical Times that “he favoured a ‘very gradual path’ for any rises as US economic outlook was dogged by global risks”.

Note however, that the comment was before the better than expected Non-Farm payrolls number of August 5.

Will that cause him to change his mind?

I think not. He as been consistent is saying that the rate rise ought to be done gradually. I rate him as a ‘1 Dove’ although Bloomberg rates him as ‘neutral’ (See Fed Hawke to Dove Scoreboard)

 

A GBPUSD Short

BarroMetrics Views: A GBPUSD Short

Back home and the jet lag? Well, slowly getting better. The first day, I went to sleep at 5:00 a.m. and got up at 12:00 p.m. Hopefully today will be better.

While in New York, I took a short GBPUSD ahead of the BOE rate decision.

Figure 1 (13-week swing chart) was the basis for my decision. Brexit resulted in a downside breakout from a congestion that started on January 23, 2009.

The pair then bounced off the Linear Regression Primary Buy Zone and retraced to 1.34789. I consider that retracement to be a retest of a 5-day swing magnitude.

If I am correct, we should now see a move to the 5-d Primary Buy Zone at 1.28774 to 1.27810 (Figure 2). At time of writing, the Value Area low at 1.30186 is providing support. A daily close above 1.13253 will provide a ‘death zone’ buy signal and will suggest that the high at 1.3480 will be breached.

So, the 1.3253 level provides a basis for a ‘line in the sand’ stop for the shorts.

There you have it:

  • Entry
  • Stop
  • Profit target for the 2nd third (Rule of 3).

2016-08-08_11-43-48 GBPUSD 13-w

FIGURE 1 13-week GBPUSD

2016-08-08_11-44-19 GBPUSD 5d

FIGURE 2 5-d GBPUSD