SBA’s Alastair Williamson concludes the Macro Morning Note from Baltimore, Maryland

Hot headlines this morning:

  • Brent oil nears $65 a barrel, natural gas prices soar
  • S&P 500 and Dow close at record highs
  • Focus on central banks ahead of policy meetings
  • Dollar inches lower against euro
  • Gold extends last week’s decline

Regional equities in the United States extended their upward momentum prior session with a noticeable weakness in small caps. Energy is soaring this morning with Brent tagging $65 handle and WTI probing into mid 58 level, after news that the North Sea’s main pipeline system was likely to shut for weeks to carry out maintenance issues.

The reflation trade in the U.S. has been on a tear since about Dec 06, perhaps due to tax reform developments or even the mention of infrastructure. Hype and hope are still driving markets with little noticeable improvement in the real economy. The dollar tags the high point of the 93 handle with UST10Y 2.39 print. Precious metals have taken a beating with gold dropping to 1243 level and silver in the high 15-handle. Industrial metals have stalled in the past few months, indicating the prop was coming from China. The global synchronized growth narrative is dependent on the commodity cycle. As we know, it has taken central banks around the world trillions of dollars printed to produce today’s narrative.

Countdown to FOMC rate hike decision tomorrow. Traders are most positioned for a +25bps move up to a target range of 125-150bps.

“Although puzzled by this year’s decline in inflation when unemployment has dropped below its own estimate of the Nairu [non-accelerating inflation rate of unemployment], the Federal Open Market Committee seems determined to deliver its third rate hike of the year on December 13,” said Philip Marey, senior US strategist at Rabobank.

“However, by trying to squeeze in a third hike before the end of the year they may also reduce the probability of delivering three hikes next year.”

Lee Hardman, currency analyst at MUFG, said: “We believe that the Fed will stick to their current plans to raise rates gradually by a further three times in 2018, although building concerns over persistently low inflation and the flattening of the US yield curve are sending more cautionary signals to the Fed.”

2s10s curve rejecting pivot .80 with a downside target S1 .30, so basically a further flattening regime is tsill in play.

Compression on UST10Y <TNX> waiting for major direction..

Meanwhile, on Thursday, the news flow will be dominated by ECB and BOE. The ECB is expected to deliver economic and inflation outlooks for the Eurozone, while the BOE is expected to perform a policy decision on the same day.

“With regards to the ECB meeting on Thursday, the focus will be on the latest staff macroeconomic forecasts, with the first outlook for 2020 due to be revealed,” said Jim Reid, a strategist at Deutsche Bank.

URE/REK Real Estate Ratio is stalling

SPY/VIX Ratio at new highs probing in extremes

Weakness in small caps

valuations are “justified”

EU and US, plus SPX500 meltup on Libor

USHL5 linear systems tend to break

Shiller PE Ratio 32.27