Friday, November 8, 2019

US and China officials agrees to roll back tariffs in possible partial trade pact; will consumer sentiment in the US beat expectations?

  • China
  • Dollar
  • Gold
  • Pound
  • Dow Jones

Market recap: BoE keeps monetary policy unchanged but looks ready for future rate cuts
US stocks rallied on US-China trade optimism after US and China officials said on Thursday that the two superpowers have agreed to roll back tariffs on each other’s goods in the planned “phase one” trade deal if completed. The DJIA surged 0.66%, S&P500 gained 0.27% and the Nasdaq rose 0.28%. The Dollar Index gained 0.19%.

The Bank of England (BoE) decided to keep monetary policy unchanged on Thursday. But the central bank hinted at possible future rate cuts, as the minutes to the meeting stated that if global growth fails to stabilize, of if Brexit uncertainty remains entrenched, monetary policy may need to reinforce the expected recovery. BoE policy makers voted 7-2 in favour of keeping interest rates unchanged. Sterling fell 0.30% against the greenback as investors priced in a higher probability for a future rate cut.

Today’s Analysis: Will probabilities for a future rate cut in January rise?
The Fed cut interest rates by 25bps during the most recent monetary policy meeting. But the central bank signalled that it is likely to put a hold on changes to monetary policy in the near-term. After the meeting, Fed Fund Futures implied probabilities for an interest rate cut was 16.5% for the December monetary policy meeting 41.6% for the meeting at the end of January.

During the week, probabilities for a future rate cut dipped even further (probability for a rate cut at the end of January dropped to 24.1% as of November 7th) thanks to positive economic data in the US. NonFarm Payrolls in October grew by 128,000, higher than the expected 85,000 growth forecasted by economists. Institute for Supply Management’s (ISM) Non-Manufacturing Purchasing Managers’ Index (PMI) also outperformed expectations, reaching 54.7 for October, implying that there may be a possible pick up in the services sector of the US.

Today’s Consumer Sentiment Survey data is also likely to affect probabilities for a future rate cut. Economists expect the survey data to remain constant at October’s level of 95.5. Other recent economic data relating to consumer sentiment has been mixed. Retail Sales for October fell 0.3%, falling short of expectations for a 0.3% growth. September’s Existing home sales also missed expectations, growing by 5.38mn units instead of 5.45mn. October’s Average Hourly Earnings also fell short of expectations but grew from September by 0.2%.

*Source: ADSS, Bloomberg

The strong labour market and easing US-China tensions may signal to investors that November’s consumer sentiment data might possibly beat expectations. If the Consumer Sentiment Survey data comes in better than expected, then the probabilities for a future rate cut in the next two monetary policy meetings should decrease further. The Dollar Index may then possibly rise to 98.21’s level (i.e. an upside of roughly 0.01%).

But if the data falls short of expectations, then probabilities for a future rate cut in April might increase slightly to 30%, and the dollar may fall to 98.05’s level. If the survey meets expectations, then expect little changes to the dollar.

*Source: ADSS

*Source: ADSS, TradingView

Bulls control the Dollar Index as it trades above the 20-day and 100-day moving average. The Bulls will likely continue to apply upward pressure on the index, possibly breaking 98.21’s level if the Consumer Sentiment Survey for November beats expectations. The bears are likely to try to stop the bulls from gaining momentum as they try to keep the index from breaking the 200-day moving average resistance line.