US markets once again made record highs yesterday as investors continued to pile in with almost giddy abandon, you could almost call it getting Trump drunk, with the Dow getting drawn inextricably closer to the big 20,000 level, ahead of today’s final Federal Reserve rate decision of 2016.
Since the election in November the S&P500 has risen over 6%, the Dow is up over 8%, and the Russell 2000 is up 15%, as investors buy into all of the good bits of the Trump narrative, while choosing to ignore the bad bits, as markets relentlessly grind their way higher, on fairly decent volume.
With markets in their current mood it is hard to imagine what could stop the index hitting 20,000 this week. Expectations are pretty much nailed on for the Federal Reserve to pull the trigger on 0.25% hike in its Fed funds rate today, the only questions now being asked as to the messaging the committee puts out in the context of their expectations for future rate rises in 2017.
Last year the Fed guided the markets to expect at least four rate rises this year, guidance that proved to be woefully wide of the mark, and it is likely that they won’t want to make the same mistake again, which suggests that Fed chief Janet Yellen can expect some serious cross examination of how the FOMC view, not only the economy, but also President elect Donald Trump’s plans for it.
Janet Yellen can also expect to field some serious questions on how the Fed views the inflation outlook, particularly since price pressures appear to be on the rise globally, particularly since last week’s Chinese PPI numbers might suggest that China might start exporting its own inflationary pressures.
Inflation certainly appears to be on the way back in the UK in numbers released yesterday, which showed that CPI hit its highest levels in two years driven primarily by clothing and fuel prices, while a rise in import prices to their highest levels since 2011 was an unwelcome portend of what could be around the corner in 2017.
In that context this morning’s latest wages and unemployment data for the three months to October is set to take on extra importance if the gap between wages and inflation, which has been declining for some months can be maintained in favour of incomes, even though we did see retail prices excluding mortgages climb to 2.5%.
Unemployment is expected to remain at 4.8%, while average earnings are expected to remain at 2.3%.
Before tomorrows Fed meeting we are due to get the latest snapshot of the US consumer and spending over the Thanksgiving break as well as Black Friday and Cyber Monday. October retail sales saw a big jump of 0.8%, suggesting that Q4 is likely to be strong quarter for the US consumer. If November’s numbers are anywhere near as good as October’s then the US dollar could well push even higher. A rise of 0.4% is expected, while PPI for November is expected to edge up as well to 1.3%.
EURUSD – the recent rebound from support at the 1.0520 level has run into resistance just above the 1.0650 area, and needs to consolidate above this level to move towards the recent peaks at 1.0870. The prospect of further losses on a break below area the 1.0500 level remain a distinct possibility.
GBPUSD – the 100 day MA at 1.2760 is currently capping any rebounds, however the underlying trend back towards 1.2880 remains positive while above 1.2450 trend line support from the October lows. Only a move through 1.2300 opens up the potential to revisit the recent lows near the 1.2100 area.
EURGBP – the euro continues to try and push towards the 200 day MA at 0.8290, which remains a key support. We need to see a recovery back through 0.8480 to stabilise.
USDJPY – the 115.60 level remains a key resistance level despite this week’s move up to 116.10. We need to see a daily close above this 61.8% retracement of the 125.85/98.95 down move, to argue for a move towards the 120.00 area. While below 115.60 we could slip back towards the 112.40 level.
