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MACRO MORNING NOTE January 04, 2017

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

Asia markets have closed modestly higher on Thursday, following the lead from Wall Street. Japanese markets closed higher on Thursday while South Korea was mixed. Japan’s Nikkei225 hit a 26-year higher, advancing +3.26% to close at 23,506 as the BOJ kept buying everything under the sun.

Meanwhile, the KOSPI declined -.80% at 2,466 with technology names mixed such as Samsung Electronics declining -1.05%.  In Australia, the ASX200 was mostly flat at 6,077 with energy-related industries higher. Our major concern is the real estate market in the area, which could be a big problem in 2018.

Greater China stock markets also received gains. The Hang Seng Index closed higher +.58%. In mainland China, the Shanghai Composite advanced +.52% to close at 3,386 and the Shenzen gained +.36% at 1,940. Overnight, the Caixin services PMI printed at 53.9 last month, verse the 51.9 for November. That is the highest level since 2014.

S&P futures are higher this morning +.17% at 2,7140 with the reflation trade mixed as dollar probes below 91 handle and UST10Y stalls at 2.469.

The US Economic Calendar:

The overall understanding of yesterday’s FOMC minutes: “Most” Back Rate Hikes, “Several” Fear Low Inflation, Financial Stability Risks, said Zerohedge.

BBG Cameron Crise notes that while it’s true that some notable doves are booted out of the voting rotation this year, keep an eye on whether an increasing number of meeting participants will require inflation measures to show up more forcefully before sanctioning another rate hike. If “several,” “a number” or “many” committee members express some unease, then we could be looking at a properly painful squeeze of Treasury shorts.

  • *MOST FED OFFICIALS BACKED CONTINUED GRADUAL RATE HIKES
  • *FED: FASTER INFLATION FROM TAX CUT AMONG REASONS TO SPEED HIKES
  • *SEVERAL FED OFFICIALS CONCERNED BY LOW INFLATION EXPECTATIONS
  • *COUPLE OF FED OFFICIALS CONCERNED BY FINANCIAL STABILITY RISKS
  • *FED OFFICIALS GENERALLY AGREED FLATTER YIELD CURVE NOT UNUSUAL

While rate hike target probabilities do not show a hike in January, there is a 67.5% chance that March could be the next hike with a target range of 150-175bps for /FF. We believe that fiscal stimulus coupled with a commodity revival as UST yields soar could stifle the economy. President Trump has used the Federal Reserve just as the Obama administration to kick the can down the road and avoid the next recession. Trump is trying to make it through the midterm elections, but we’ll see if adding even more leverage is the right thing to do…

In Forex, the dollar gave up all 2018 gains printing in the 91 handle. We’ve been short bias on the dollar from last year’s 99.26 pivot break. If 92.94 continues to reject, there is a high probability that 87.50 is the next level. What frightens us is that Yellen’s surge in the Dollar is unwinding and it could occur in a very big way. Alternatively, this would be great for commodities. The EUR/USD prints at 1.30629 with the GBPUSD at 1.35495.

In commodities, WTI surged to the 62 handle overnight as API data showed:

  • Crude -4.992mm (-5mm exp)
  • Cushing -2.11mm
  • Gasoline +1.87mm (+2mm exp)
  • Distillates +4.272mm (+500k exp) – biggest build since Jun 2017

7th Straight Week Of Crude Draws, but notice the building in products.

Industrial metals remain at 2013 levels with copper probing 3.287. NatGas is in the 3 handle following the severely cold weather in the United States, but that could be coming to end by the second half of January. Ever since the December 2016 rate hike, precious metals have been risked on. Commodities as a whole could due to a big move higher. This is thanks to trillions printed by Central Banks coupled with a dollar suppression.

GSCI precious metals and industrial metals (monthly, along with at the end CRB Index (monthly).

Copper/Gold Ratio expecting to send UST10Y higher?  Higher rates could stifle the economy.

Much larger timeframe of the SPX500 remains in the overbought trajectory.

New Highs in SPX/VIX Ratio

World Stocks hit new highs in this Central Bank induced climate. CBs have no other choice but to raise asset prices and deal with the adverse political climate.

BDI starts to decline verse SPX500

Today’s excuse to buy commodities: it’s the cheapest ever in relation to stocks…

EEM/SPY Ratio, last time this happened stocks declined in the latter selling cycle of the DotCom bubble.

UST10Y nearing a breakout or more compression?

WTI verse 2s10s curve?

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Bonus Charts:

Something in America smells… 

China weakness in 2018?