None of the weekend's events are market moving in themselves. The debate that rages (above all others in my opinion) is whether Trumponomics truly increases investment and productivity to create 4% growth and 2.5 million jobs (over the coming decade).
The answer to this dynamic will take time to materialise, although we have seen some positive trends in small business confidence and the new orders sub-component of the US services and manufacturing ISM.
With this in mind, US growth will be in focus this week, although the market is more concerned with future growth, specifically when we have a far clearer idea on the fiscal policies and the Republican plans actually start to kick in. The current consensus for Friday’s Q4 GDP print sits at 2.1%, which is in-line with the New York Federal Reserve’s NowCast model, although the Atlanta Federal Reserve’s model is a more impressive 2.8%. While there is much data still to come before the Q1 print is released, the New York Federal Reserve have 2.66% set at this stage.
The guide for markets continues to come from the US fixed-income market, where on Friday there was strong indecision from both the bull and bear camps. Yields are starting to creep higher again, but whether there is the impetus to head towards the 15 December high of 2.63% is another thing. The USD is of course key for global markets, especially when the world is some $55 trillion in US-denominated debt (source: BIS). While the USD will follow yields in the bond market, we can also see the index still holding the 100 level. Interestingly, we can see US five-year inflation expectations still holding up nicely at 2.06%. I see this as a good guide on all things Trump.
The S&P 500 is moving almost perfectly sideways, as highlighted by the flat move in the 20-day moving average. A two standard deviation move either side of this short-term average gives us a trading range this week of 2284 to 2246, which should contain moves for now, especially with the RSI in the middle of the range and implied volatility at such low levels. The US equity market is a range trader’s paradise and one questions whether earnings could throw the broader index around a bit more this week with 29% of the S&P 500 market cap reporting.
With around 13% of US corporates reported thus far, we have seen 74% beating on the earnings line (by an average of 3.4%) and 47% on sales. As a whole, we have seen 3.4% aggregate earnings growth and it won’t surprise that this is largely driven by the financials, where we have seen earnings per share (EPS) growth of 9.3%.
The 0.3% rally in the S&P 500 on Friday should support Asian markets today, with good leads notably for materials (the S&P 500 materials sector closed up 0.6%) and our call for the ASX 200 sits at 5675 (+21 points). It’s interesting to focus on price action in the local market, with the bears seemingly in control. The Aussie index has dropped 3% since 9 January, but in that move the index has printed five lower lows and has only once managed to break the prior days, although the sellers immediately came back in. So the question of the day is whether the market uses this early strength to offload holdings.
In a strong trend, one will tend to find moves into the five-day average contained. This is the case here, so I would be using any rallies into this average (now at 5695) to increase bearish exposure, although strong support kicks in around 5611 to 5625 (1 August high). It will be interesting to see if we see the buyers kick in here.
Locally, the highlight of the week remains the Aussie Q4 inflation print on Wednesday, with the consensus expecting headline inflation of 0.7% quarter-on-quarter and underlying inflation of 0.5%. Interestingly, we have seen five-year inflation expectations in Australia moving from 1.32% in July to currently sit at 1.90% (the highest level since March 2016), while the swaps market is pricing in 11 basis points of tightening over the coming 12 months. Of course, AUD/USD will be sensitive to this data flow, especially with the hedge fund community running an almost perfectly neutral position and searching for further clues from the Reserve Bank of Australia. On Friday, price traded in a range of $0.7588 to $0.7515 and continues to hold the 75 handle despite bulks under pressure (spot iron ore fell 0.7%, while iron ore, rebar and coking futures lost 2.9%, 2.3% and 3.7% respectively).