Spot values at a glance:
Asian equities climbed Monday, building on this year’s strong start that’s pushed the regional benchmark index to a record high as investors bet an expansion in corporate earnings won’t falter any time soon. Treasury yields extended a recent rise, while the dollar rebounded after 7 weeks of declines. Crude oil lingered near multi-year highs while gold declined back below $1,350/Oz.
US GDP Lags:
The US economy expanded at a slower-than-projected pace in the fourth quarter on drags from trade and inventories, offsetting strength in consumer spending and business investment that signals solid momentum entering 2018. GDP rose by an annualized 2.6%, less than the prior gain of 3.2% and below the median estimate of 3.0%.
Consumer spending, the biggest part of the economy, rose 3.8%, the best in more than a year. Business equipment investment grew at the fastest pace in 3 years. The Fed’s preferred inflation gauge, the core personal consumption expenditures price index which excludes good and energy, gained 1.9% quarter-on-quarter, in line with expectations and accelerating from last quarter’s 1.3% increase. This was the quickest pace in more than a year.
President Donald Trump’s move to cut taxes may give the economy an additional boost in 2018, though reaching his goal of sustained 3% GDP growth will prove challenging, in part because household purchases are projected to cool. Weak productivity and slow labor-force expansion will also pose hurdles in the longer term, and higher borrowing costs could crimp gains as well.
Trump’s Infrastructure Push:
President Donald Trump plans to use Tuesday’s State of the Union address to build momentum for sweeping legislation on infrastructure and immigration that could buoy the White House and fellow Republicans ahead of crucial midterm elections. Trump plans to make the case that the tax cuts passed last month and his administration’s efforts to curb regulations are drawing investment to the US and creating jobs, said an unidentified White House official, Bloomberg news reported.
This year, aides say, he’ll offer a future-focused vision. His agenda, the official said, includes a long-anticipated plan to rebuild and improve the nation’s infrastructure, continuing efforts to cut regulations, and an overhaul of the immigration system – campaign promises that got set aside last year as the administration focused on efforts to repeal Obamacare and pass the tax overhaul.
Trump also wants to limit a program that gives preferential status to the families of US citizens and immigrants, and eliminate the visa lottery program. However, critics say the president’s plan would sharply curtail legal immigration and waste money on a barrier that would prove difficult to build and only a slight deterrent to illegal immigration.
The president is also expected to highlight his administration’s protectionist trade policies, saying the withdrawal from and renegotiation of international trade agreements has helped retain American jobs.
Goldman Sachs Expecting Hawkish Fed Meeting This Month:
Goldman Sachs Group Inc. is expecting a slightly hawkish upgrade of language when at the Fed meeting this week, slated to be Janet Yellen’s last, Bloomberg news reported.
“We expect the FOMC to issue a generally upbeat post-meeting statement that includes an upgrade to the balance of risks and a slightly hawkish rewording of the inflation assessment,” Goldman economists led by Jan Hatzius wrote in a note dated Saturday. “Taken together, we believe the tone of the statement will be consistent with a hike at the March meeting, barring a sharp weakening in economic conditions.”
Inflation remains below target, but measures of it have firmed recently and “we think many Committee members will view the core inflation rebound in recent months as additional evidence that last year’s shortfall largely reflected temporary, idiosyncratic factors,” the report added.
Canadian Inflation Holds Near 2%:
Canadian inflation hovered at about the central bank’s 2 percent target for a second month in December, the result of a year of strong growth that is finally beginning to produce signs of more normal price pressures. CPI in December gained 1.9% year-on-year, in line with expectations and decelerating from November’s rise of 2.1%. On a month-on-month basis, CPI slipped 0.4%, more than the 0.3% fall predicted.
Friday’s inflation release marks only the second time in the past 3 years the economy has produced 2-month inflation averaging at least 2%.
Investors are anticipating at least 2 more increases this year, after the Bank of Canada hiked borrowing costs 3 times since July. The pick-up at the end of 2017 brought average inflation for the year to 1.6%, which was stronger than 1.4% in 2016 and 1.1% in 2015. The Bank of Canada expects inflation will stay at about 2 percent on average over the next two years, in line with an economy around full capacity.
Chinese Offshore Equities Surge On:
The growing frenzy for Chinese offshore stocks has taken a new turn as investors bid up underperformers. About a third of the companies on the Hang Seng China Enterprises Index racked up fresh 1-year highs last week, the biggest proportion since the country’s 2015 stock bubble. Laggards such as PetroChina Co. and China Galaxy Securities Co. have soared, while stubbornly cheap banks have started to gain higher.
The bull market in the China H-share gauge has extended into its 714th day, one of the longest in its 23-year history. As a perennial underperformer itself, due to the index’s dominance by sprawling state-owned enterprises, there’s little for investors to worry about in terms of valuations. Even after an 83% bull run, the Hang Seng China Enterprises trades at 8.8 times its members’ projected earnings. That’s a 39% discount to the tech-heavy MSCI China Index, while a gauge of global equities is about twice as expensive.
A slumping Hong Kong dollar, a product of recent USD weakness, is adding fuel to the rally, by making the city’s shares cheaper in other currencies, while inflating the value of Chinese companies’ yuan-denominated earnings.
USDSGD extended Friday’s rebound off the 1.3000 psychological support, gaining back to 1.3100 earlier today. The currency pair has declined for seven straight weeks, and is due for a pullback, amid signs of it being oversold indicated by its relative strength index. A rebound back up to 1.3200 is possible over coming week.
Over the longer term, the bias for USDSGD continues to remain to the downside; the next support can be found at 1.2830 – a significant level, having been a past resistance in 2013 and 2014.
The SGD has been trading nearer towards the stronger end of its trade weighted basket for several months, with a modest tightening at the April MAS meeting expected.
AUDUSD failed to hold above the key 0.8100 handle, retreating back below it earlier today following a recovery in the USD. Strong resistance continues to remain at 0.8125. A pull back to the 0.8000 handle is likely after the currency pair’s recent rally from 0.7500 since December.
Analysts are continuing to stick with their bearish outlook for the Australian dollar, according to Bloomberg news. Factors such as falling iron ore prices, a gradual but discernible deceleration in Chinese growth and widening interest-rate differentials between Australia and the US are expected to contribute to AUDUSD’s decline in the future.
USDCAD continues to be supported above its 1.2300 handle, even as crude oil continues to edge higher Monday. The FX pair is expected to trend sideways over the near term, between the range of 1.2300 and 1.2600.
2 weeks after breaking below the important 6.4436 support, USDCNH seems to have found some support at tis 6.3000 handle, rebounding off the level last Thursday. Offshore yuan is currently trading near at its strongest level against the USD since the PBOC devalued the yuan in August 2015.
Momentum remains firmly to the downside, with the currency pair last week closing below its 200-week average for the third consecutive week – the first time it has done so since July 2015.
The yen declined after the BOJ downplayed Governor Kuroda’s comments on improving inflation, clarifying that Kuroda wasn’t revising the inflation outlook when he said in Davos last week that consumer prices are finally moving close to the 2% target. The key support remains at 107.50.
GBPUSD resumed its retreat from a post-Brexit referendum high reached last week. Having risen by as much as 6% over the past 2 weeks, some correction is expected for the currency pair. A pull back to the 1.4000 is likely this week.