Friday, November 15, 2019

S&P500 extends record high levels; all eyes on US retail sales for October today

  • Dollar
  • Gold
  • Yen
  • Euro
  • Stocks
  • US Retail Sales

Market recap: US futures gain on Friday morning on renewed US-China trade war optimism
US stocks ended Thursday mostly flat as the DJIA lost 0.01%, the S&P500 inched 0.08% higher to 3096.63 and the Nasdaq fell 0.04%. Disappointing earnings from Cisco was balanced out by Walmart’s better-than-expected earnings report for the quarter. US equity futures gained after White House economic advisor Larry Kudlow said that the US is getting close to a trade deal with China as the two superpowers have been in close touch via telephone. DJIA E-mini futures were 0.07% higher as of 4.36am (GMT +4). The Dollar Index retreated 0.21% on Thursday, after Initial Jobless Claims in the US rose to 225,000, missing expectations of 215,000.

Safe haven assets continued to gain as investors remain cautious on the US-China trade war and as the global economy shows more signs of slowing. Japan’s GDP for Q3 expanded at 0.2%, much lower than the 0.9% growth that economists expected. China’s Industrial Production for October expanded at a slower rate of 4.7% from 5.8% in September, falling short of economists’ expectations of a 5.4% growth. Gold gained 0.53% and the yen strengthened against the greenback by 0.37%. US treasury yields fell for the third straight day. Two-year yields fell 4bps to 1.59% and 10-year yields retreated 7bps to 1.82%.

Germany narrowly avoided a recession, as GDP grew by 0.1%, instead of the expected 0.1% contraction. The euro gained 0.14% against the dollar. But German Finance Minister Olaf Scholz signalled to the market that fiscal stimulus in Germany may be less likely after the country avoided a technical recession.

Meanwhile in Asia, major indices opened higher on Friday thanks to renewed optimism on the US-China partial trade pact. The Nikkei, Hang Seng Index and Straits Times Index started Friday’s trading session 0.08%, 0.78% and 0.21% higher.
In the week ahead, Saudi Aramco’s Initial Public Offering (IPO) will be the highlight for Monday, November 17th as the oil giant will be revealing the price range for its IPO. The subscription period for individual investors will run from November 17th to 28th.

Today’s analysis: Will US economic data continue to beat expectations?
US retail sales data for October is set to be released later today, at 5.30pm (GMT +4). Recent economic statistics from the US defied economists’ expectations and the market will most likely look to see if this new data will continue to beat expectations (and would indicate that the US economy is not contracting as fast as expected).

Recent data that has beaten expectations includes the NonFarm Payrolls report, the Institute for Supply Management (ISM) Non-Manufacturing Purchasing Mangers’ Index (PMI) and Inflation for October, and the University of Michigan’s Consumer Sentiment Survey for November.

*Source: ADSS, Bloomberg

Fed chairman Jerome Powell signalled again during his speech to the US Congressional Joint Economic Committee that its monetary policy is likely to be paused in the near future, as long as economy numbers are within the Fed’s outlook. Powell also highlighted risks such as the global slowdown and trade war developments that could change the Fed’s outlook. The speech was in line with market expectations but did dampen any optimism for a rate cut in the near future.
Investors will likely be looking at incoming economic data for signs of a future Fed rate cut. Fed Fund futures imply that a rate cut is only likely after April’s monetary policy meeting next year, as probabilities for a rate cut before then are less than 50%.

Economists expect October’s retail sales numbers to grow 0.3% month-on-month, after contracting 0.1% in September. It is likely that retail sales will show some form of regression to the mean and expand from September after unexpectedly contracting 0.1%. But it is unlikely that the data will largely beat expectations, due to the ongoing uncertainty due to the US-China trade dispute.

If October’s retail sales data beat expectations, then expect the dollar to rise against major currencies as consumer demand looks to be stabilising in the US. The Dollar Index may then possibly gain past 98.21’s level to 98.45 as a result. But if October’s retail sales fall short of expectations, Fed fund futures will likely reflect a higher probability of a future rate cut in the next monetary meeting next year. The Dollar Index should then weaken past 98.05’s level to range between 97.85 and 98.05.

*Source: ADSS, TradingView

The Dollar Index continues to trend upwards as the US and China progresses towards a partial trade deal. But the bears are currently in possession of the dollar after the US employment market looked weaker on Thursday after Initial Jobless Claims rose to 225,000. Expect the bulls and bears to be in a close fight before today’s Retail Sales data for October is released. If retail sales beat expectations, then expect the Dollar Index to possibly rise past the resistance level of 98.21 as the US economy looks stronger-than-expected.