"Maybe we should teach schoolchildren probability theory and investment risk management." -- Andrew Lo
Traders are dealing with a lot right now. We've more than gone over the political risk permeating our environment this week. Many try to blame chaos in the White House, but that's not quite it. It's more like chaos in Washington all together. Washington is simply not used to the kind of aggression that comes from a leader that has made a career in the private sector. There is not one ounce of bureaucrat in our new president.
Washington is also not used to a leader that lays out his or her ideas, and then goes about trying to accomplish every single item on the list ... yesterday. Now, on top of the distraction that is the slow road to confirmation for still the majority of the president's newly proposed cabinet, and on top of the distraction that is sure to be a partisan fight over the president's nomination of Neil Gorsuch to the Supreme Court, comes this distraction from Iran.
Iran has likely pushed the limits of the UN resolution with that ballistic missile test, and this pushed the Trump administration to put Iran "on notice". What "on notice" is supposed to mean is for Iran to figure out. What the investing public must now figure out, is the cost of geopolitical risk in a marketplace already awash in moving risk of all types. Yes, the very same marketplace that appears to have run as far as it can on hope and confidence.
The policy statement released yesterday by the Federal Reserve Bank was clearly indecisive in nature. Far be it from me to praise the Fed, but this was the correct stance taken at this time. Though some of the most recent macro does appear to reflect an improving economy, we are still only one month removed from the weakest year for US economic growth since 2011. This hardly portrays an environment conducive to reckless wordage on an announcement date that came with no press conference (allowing for explanation) attached.
Unless those of us who claim to be financials professionals raise both hands, and surrender our aggregate claim on the ability to reason, then we understand the committee's intent. As a group, they have made more than clear that they are merely looking for justification to act at this point -- and at this point, they cannot.
One place that I thought the statement could have gone would have been to discuss the eventual removal or reduction of the reinvestment of principal payments, and proceeds. This could have been a semi-stealthy way to place hawkish language in the statement without breaking anything that can't easily be put back together, should the need arise, without an avalanche of embarrassment.
Forex rules the World
The Bank of England made its policy announcement at 7am ET. There was no movement on policy. There was no extension of their quantitative easing program. There was an upgrade made to future GDP growth, which is seen at 2% this year. Governor Mark Carney, who has been something of a hawk throughout his career, holds a news conference at 07:30. Currently, the British pound buys about $1.265. That is where reaction to this policy meeting in the UK will be felt in U.S. markets.
The DXY basket, also weighed down by the less than pleasant conversation that President Trump apparently had with Prime Minister Trumbull of Australia, has moved down into the 99.30s this morning after finding some support at 99.25. This will have the entire commodity complex poised to move higher this morning. Should the early morning selloff in equity index futures hold, or even exacerbate after the open, this is where the money will flow. Energy and materials stocks will be our morning hiding spot.
08:30 - Initial Jobless Claims (Weekly): Expecting 252,000, Last Week 259,000. You know that times have changed when a print of 259,000 like we saw last week, seems stunningly high. It is this regularity at extremely low levels that has made this particular item far less important to traders than it ever used to be. A combined product of both job growth on the national level, and underemployment at the individual level. The four week moving average for first time claims is now 245,500.
08:30 - Non-Farm Production (Q4-p): Expecting 1.1%, Q3 3.1% q/q SAAR.
08:30 - Unit Labor Costs (Q4-p): Expecting 2.0%, Q3 0.7% q/q SAAR. The third quarter brought a welcome reprieve from three straight quarters of plunging worker productivity coupled with rapidly rising labor costs. The unfortunate expectation for the fourth quarter is that increased labor costs will again outstrip gains made in productivity. The small positive, should these projections come close to fruition would be that at least productivity would have avoided outright contraction, as it had over that three-month stretch.
10:30 - Natural Gas Inventories (Weekly): Expecting -98 billion, Last Week -119 billion cubic feet. The Energy Information Administration is expected to report an eleventh consecutive weekly draw on Nat Gas supplies. This number will not greatly impact your trading session unless you are directly trading the space. Natural Gas prices have softened over the last two weeks, and one spot to keep your eye on upon this release would be the 3.11 support level. That spot breaks, and you could see a 15 to 20 cent move.
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 turn.
SPX: 2300, 2292, 2282, 2272, 2265, 2258
RUT: 1375, 1370, 1364, 1357, 1348, 1342
Thursday's Earnings Highlights (Consensus EPS Expectations)