US Economic data not supportive of early rate hike
While many were looking for June 2015 rate hike by FED, MARKET PULSE view was for not earlier than September 2015 with higher probability at front-end of Q4/2015 with maximum of 2-step 25 bps hike before extended pause through 2016. Based on this outlook, did not suggest to chase DXY gains beyond 100 (Euro weakness below 1.05) and DJIA recovery from 17000 to 18500 against ease in 10Y US yield from 2.35% to 1.85%. Accordingly, DXY got pushed back from 100-100.50 to 95-96.50 (EUR/USD from 1.0450-1.05 to 1.10-1.1050), DJIA recovered into 18000-18500 and US 10Y bond yield hit 1.85%.
Weak economic data print points to delayed start at back end of Q4/2015
It was extended relief for markets from prospect of further delay in start of rate hike cycle to December 2015 or early Q1/2016 (from September - October 2015), while retaining the quantum of hike at 50 bps through 2016. This change in outlook pushed DXY below 95-96.50 into 92-93.50 (EUR/USD beyond 1.1050 into 1.14-1.1550) and stability in DJIA at 18000-18500. What is intriguing is the sharp spike in US 10Y yield beyond set consolidation zone of 1.85-2.10% into 2.20-2.35%?!
What next? Period of consolidation without clarity on the turnaround point
While the medium/long term outlook is intact, pipeline economic data will provide clarity on review of the timing of start of rate hike, having already priced-in December 2015 rate hike. The risk remains for review of outlook back to September/October 2015 (on positive data print confirming growth momentum, consumption pick-up and lower unemployment) rather than delay of the inevitable beyond December 2015.
It is difficult to set turnaround point at this time, while markets continue to stay in buy-dips mode in DJIA into 18000 for 18500, sell-on-recovery mode in DXY into 95 for 92 and buy-on-dips mode in EUR/USD into 1.1250 for 1.1550, but beyond here will be high risk chase till better clarity from pipeline economic data print from the US and Euro zone. US 10Y bond yield at 2.35-2.50% is good cover for 50 bps rate hike between October-December 2015 for short term consolidation play at 2.0-2.35% and break out either way is excessive.
All taken, near term outlook is for bullish consolidation mode in DJIA at 18000-18500 for print of new high above 2nd March 2015 high of 18288, sideways mode in DXY at 91.50/92.25-94.50/95.25 (EUR/USD at 1.1050/1.1150-1.1550/1.1650) and neutral consolidation mode in 10Y bond at 2.10-2.35%. The strategy is to stay back and forth with stop on break either way.
DXY unwind from over 100 to below 93.50 is relief to Gold with 2-step recovery from 1135-1145 and 1160-1170 to 1220-1235. An extended bearish consolidation of DXY can extend recovery beyond 1225-1235 into 1245-1270 before down to 1145-1270. The strategy is to be in buy dips mode into 1205-1215 for switching sides at 1250-1265 with tight spot either way.
Brent 2-step recovery from 45 and 52.50 met recovery target of not beyond 70-72 (high at 69.63), post which finds support below 65 at 64.00-64.25. Retain set short term focus at 60/62-70/72 with no major cues to trigger sustainable break out either way.
Moses Harding
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