"When there's downward pressure on growth, one choice is to adjust economic policy, increase deficits, relax monetary policy. That might have a short-term benefit, but may not be beneficial for the future." -- Li Keqiang
Probably the highest profile event of an already crowded day for macroeconomics will be the Fed's policy announcement at 2pm ET. The FOMC policy statement will be all you have to go on, as there will be no press conference and no economic projections made today -- not that those projections have been very useful when they are made available. Market expectations are for no increase in the target range of the fed funds rate until June, with May being a month where the possibility will be considered depending on the underlying data. To put things in perspective, for today fed fund futures are pricing in a 4% chance of an increase at today's meeting, while also pricing in a 6% chance that there will not be a single hike made in 2017.
From my point of view, there will have to be dramatic improvement seen in wages, core consumer inflation, and economic growth early in the year for the FOMC to stay on track for the three 2017 increases that many have been speaking about. I find it more likely that the FOMC finds itself trying to squeeze in that second increase late in the year. The longer it takes for the new administration to implement lower taxes, and ramp up fiscal spending, the further our one has to push higher interest rates. Yes, I know that the Fed Chair has openly worried about the economy overheating. But, coming off of the worst year for growth since 2011, I'm just not feeling the burn, Janet. Just imagine where that 1.6% 2016 full year GDP would have been without that bumper soybean crop in the third quarter.
You may or may not have noticed Peter Navarro, head of the president's National Trade Council refer to the euro as "grossly undervalued". This is not the first time that the president, or someone from his administration, has made a blatant attempt to talk down the dollar. This, my friends, is very interesting. Very interesting, indeed. The possibility exists that we see a weaker dollar policy pursued by the U.S., as the administration tries to make bilateral trade deals with individual nations.
If this coincides with actual forward progress on the president's economic agenda sometime this year, or early next, the growth, and public spending would provide enough cover for the Fed to then raise rates freely without pushing the DXY to uncomfortably high levels. This would also make a lot of currency traders very, very wrong, and force them to cut portfolio risk in this area as this year winds down. Okay, gang I'm ahead of myself, but there is a path here.
Gold in Dollar Terms
Gold! As long as the U.S. dollar is plumbing some new depths vs. its competitors, commodities priced in those very same dollars gain strength. The political risk that mildly shook equity markets over the last two days adds to the yellow stuff a touch of safe-haven value as well. Gold peaked at $1215 yesterday, below my $1220 level. For me, the $1220 level is sort of gateway, which would technically allow a run to levels above $1300 ($1305).
These are areas that I think traders need to keep their eyes on. Currently, my sample portfolio allocates 6% toward gold. My thought right now would be to go to 7.5%, but I will not pull that trigger just yet. I want to see some momentum, and on a day where the catalyst is not a weaker dollar. Should gold at least hold these levels, as equity markets regain stability will be our first clue.
All Day: Total Vehicle Sales (January): Expecting 17.8 million, December 18.4 million units. 2016 was a record year for auto sales. In fact, sales have risen now for seven consecutive years, and that full year record that 2016 broke ... was set in 2015. This is a leading indicator of consumer health, and will impact the headline retail sales print in two weeks. The reason that this will not have a major impact on your day as a trader is the piecemeal way that the number is released, and then put together. The individual auto-makers will, however react in real time.
08:15 - ADP Employment Report (January): Expecting 166,000, December 153,000. This payrolls number released two days prior to the BLS data has been a remarkably accurate predictor for the nonfarm payrolls release of late. You'll have to allow that this is only a private payrolls number, but over the 12 months of 2016, the ADP print has averaged 180,000, and the BLS print has averaged a smidge above 182,000. On top of that, both of these prints hit the tape in the mid-150,000s for December. This item will impact equity index futures markets at the time of its release.
09:45 - Markit Manufacturing PMI (January-rev): Flashed 55.1. This is sure to be the most overlooked macroeconomic data-point of the day, due to what comes 15 minutes later. While that much is true, this item should serve as further notice that American manufacturing has bottomed, and is on the rebound. Should the Flash number hold, this will be the strongest release in this space since March of 2015.
10:00 - ISM Manufacturing Index (January): Expecting 55.0, December 54.7. This much more focused-upon manufacturing number has printed in both expansion, and successively higher growth for four consecutive months. A fifth is expected, but increased expansion could be a close shave. New orders, production and pricing have been exceedingly strong of late, and as always those new orders will remain the most important sub-component here today. The marketplace will likely react to this item.
10:00 - Construction Spending (December): Expecting 0.2%, November 0.9% m/m. Last year (2016) was a tough one for construction spending. Though October and September both printed in vastly improved fashion, the expectation is this number will tail off a great deal today. Due to the somewhat dated nature of this release, it matters more for subsequent fourth quarter GDP revisions than it does to the marketplace today.
10:30 - Oil Inventories (Weekly): API +5.8 million, Last Week +2.8 million barrels.
10:30 - Gasoline Stocks (Weekly): API +2.9 million, Last Week +6.8 million barrels. Due to the consistent inaccuracy of professional consensus, I have dropped those numbers from this space completely, and replaced what the street is expecting with the Tuesday night American Petroleum Institution data. Those numbers, while usually in disagreement with these Wednesday EIA numbers, end up being somewhat closer in my opinion. Oil prices came under pressure last night after these sizable builds were reported by the API. However, crude prices stabilized this morning as Russia went ahead and cut production by up to 1.2 million barrels a day. This move was expected.
14:00 - FOMC Policy Announcement. With the odds of a rate increase being announced at this meeting down around 4%, this announcement will likely pass somewhat quietly. There is no press conference, and there will be no economic forecasts made. Any market moving shove will have to come from the statement itself. With the just-released GDP numbers showing sub 2% growth both for the quarter, and for the year and with a stagnant Core PCE Price Index, this gang is going to have to ratchet down their expectations for the year at some point.
Sarge's Trading Levels
These are my levels to watch today for where I think that the S&P 500, and the Russell 2000 might either pause or
SPX: 2300, 2292, 2282, 2272, 2265, 2258
RUT: 1375, 1370, 1364, 1353, 1347, 1342
Wednesday's Earnings Highlights (Consensus EPS Expectations)