The Reflation Trade

Or the rate of change of inflation over time –  The Inflation rate is declining over time, but it remains positive. (Their verbiage – not mine.)

Central Banks despite their huge and sustained injections, can’t effect change… Yet… despite massive efforts Globally.

#CHINACPI #DISINFALTION
China CPI

 

 

 

 

 

 

 

China faces greater economic risks internally – The PBOC will need to mobilize once again, even with massive RMB injections.

Global reflation is failing while Debt extends.

#REFLATION #INFLATION
Global Reflation

 

 

 

 

 

We must consider what Central Banks will employ.

I don’t believe Monetary efforts will assist in preventing a further decline. Governments are going to be required to spend and spend at a pace unseen in Human History.

 

Fast Cache – Part 1/2

What has the Monetary Order in store for the Hoi Polloi?

A large dose of Confusion, Fear and Chaos.

Where is it all heading? Clearly not to a welcome destination.

With the latest declaration of a “Trade War” with China – the response will be instructive for the Longer Term horizon. There will be a very large reaction and where it points will provide the short term response in all Markets.

The dial is being turned up to 11 quickly.

Which begs the question why now?

What is the desired outcome?

Where will The United States Capital Stocks head?

How deep will the effect become over the next few months?

Is this the end of the Federal Reserves Liquidity-Fest for the next few years?

We can begin to assess some of the above in thesis and theory based upon History.

Currency

91.88 is my Line in the Sand for the Dollar low. Should it break this level and close under it – the potential for further downside increases in probability.

92.50 is acting as support for now.

The Euro would need to break above 119.50 on a closing basis to mover higher – 120 to 125. Irrationality rules as Europe is clearly in dire straights as well.

11750 – 11800 is acting as support – should it fail and close under – the 112s open up with the Gap Fill at the 108s. Volatility has picked up and will continue as the Algos remain on the Hunt for every penny.

The Yen is range bound – it did close its Gap Fill… Caution is warranted now as it spiked and was sold down. The next few weeks should prove to be pivotal for the Yen.

Bonds

Fed Funds & Capital Flows continue to lead Short Term Rates.

Momentum, Strength and Trend are quite Bearish and have been for some time. The boundaries for Fed Funds is 764.050 – 1220.500.

The Dynamic Yield Curve in retrospect is interesting – as should the Dollar strengthen – something will need to give to prevent the Short End of the Curve from becoming unruly.

In the past – an Equity selloff has been used to contain accidents.

I believe this will no longer perform as intended and the Federal Reserve understands. Yes it will provide short term relief… but it will remain very short in duration.

Capital flows have reversed Globally with China’s Bond Market becoming the largest recipient.

Bond Connect arrived just in time this was no coincidence and why I presented its importance back in July – it represents an exit.

China’s Bond Market is absorbing inflows at a record pace now. It can reverse quickly as a “Trade War” will cause disrupt all movements Globally.

Global Capital Flow
Global Capital Flow

Equities

Prior August declines in 2014, 2015 & 2016 were volatile. Large retracements during each of these seasonal declines were typical. Will it be different this time? I do not believe so, Monday’s are typically low volume affairs with participation on the weaker end of the Price action during the week.

I believe tomorrow has the potential to be quite different – participation will have increased as the weekend Headline News did little to calm the already nervous and twitchy Investor herd. A large Gap down overnight would appear to be a high probability.

Always consider the irrational – a best practice. We will need to watch it trade first.

The Dow has remained a leader for months on end. This is atypical as the ES has been the leader and is understood to be such by participants. A divergence began awhile back and it festers to this day. Over the past few sessions the ES has “appeared” to revert to its leadership role, but the time period observed is extremely short. It has been easier to move the Dow/INDU as it has a far narrower component.

Among the Public – the DOW is what is most often mentioned, rarely does one hear the S&P given the same weighting in perception.

DOW

The INDU has traded below support @ 21,862.

21851 was the Friday Close.

This indicates a dip in of support by 11 ticks, one tick under the 12 rule.

An extension to lower lows is clearly being suggested.

22,179 (Cash) August High from the 21,496 July Low – provides a HWB (50%) @ 21,837 for Cash.

I’m using Stock Charts as most do not trade Futures and receive the benefit of Fib discipline without confusion.

21,858.32 was the Friday Close.

We need to watch for the Overnight gap down below 21,837 Cash.

21,842 was Friday’s low, 5 ticks away.

S&P

2407.70 was the July low – the August high is 2490.87.

The HWB stands @ 2449.25.

Friday’s close – 2441.32 – the ES failed at ST Support.

The Dow remains in divergence for now against the ES loss of support, although the DOW is very close to losing support.

Moving out to a larger draw in time… April 13, 2017 – the low was 2328.96.

A draw from Low to the High of 2490.87 – the HWB would be 2409.90.

2425.53 is the Gap Fill on the Daily.

These are the levels that need to be watched this evening. 

Please remember – large retracements are part and parcel of the prior August sell-offs in 2014, 2015 & 2016.

It is quite possible a far larger retracement to the downside is being traded, it simply has not shown itself – yet. 

The potential for a far deeper retracement cannot be discounted.

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Precious Metals update will be presented later today in Part 2 of this update.

 

 

 

 

Reversals

We should see reversals in all Markets prior to Labor Day – September 4. Equities should retrace prior to the next drop. These are quite normal and given the market is well controlled on low volumes – quick and sharp reversals should be expected.

The Fear trade will quietly die off and begin a rapid re-adjustment or be moved aside for further gains later this year or it will simply implode under its own weight.

Technically – it’s been a very sloppy set of Markets. They do remain quite technical – hitting targets to the tick in many instances.

More on this Tomorrow. I remain bearish – Intermediate Term – on the Metals Complex, with a retest of the prior 2015 lows ahead at minimum – here are the qualifications:

Support is building underneath the PM Complex – 1220 to 1240 – a break of 1220 leads me to believe we will hit 1170 and should be break this level – the lows will be retested. Upside remains 1338 at the weekly downtrend – The monthly is 1362.50 – this is opened as well, but may be a stretch.

It’s going to become volatile once again – although in reverse once the Dollar begins to shake off the 92.50s and move higher. 91.88 remains the warning sign the DX could head lower still.

The Trade War is now front and center… bumpy road ahead.

1982 – Prior Positive Correlation Au/DX

Thanks to Christopher Aaron @ iGold Advisor for jogging my brain this afternoon. Chris was kind enough to send me his thoughts and analysis.

His piece brought my mind back around to an unusual environment… as the Markets grow increasingly complex over time. I was reminded of the prior positive correlation of the Dollar and Gold – 1982 to be exact.

As you can see – it’s been awhile since the US dollar and gold price moved in the same direction.

Gold being priced in dollars – the traditional correlation has been inverse. The most recent and short-lived Positive Correlation was in January of 2009 when the rally in the US dollar corresponded with the rise in the gold price – out of the 2007-2009 Finacial Crisis – both Gold and the Dollar rose together.

During 1982 recession hit many countries including the United States… The rise in gold prices can be partially attributed to future inflation problems (i.e.. Stagflation during the late 70’s and into 1980).

That was then… a paired movement in the value of gold and the US dollar suggested central banks around the world were losing credibility.

The US dollar has been falling for some time now – the twilight of its immense seniorage privilege could be closer than we imagine.

Gold usually informs the market that investors are worried about global economic stability outside of the US and preparing for the worst – this of course is tradition… it is missing due to an intense effort to stifle the Price of Gold and Silver since 1934. Since 2011 – this effort has intensified orders of magnitude.

Often things just get screwed up, this may well be one of those periods. We shall see – this was to serve as merely a subtle reminder – we can expect the unexpected – it’s not irrational, we simply don’ know until it ex-post.

Will it happen again, It could… than again, the DX could simply fall to 70 and that would be spectacular for Gold & Silver – but rather ruinous for our Nation.

 

Delta

I had a profit Target for the ES @ 2264 during the 2016 Election cycle. We completed and exceeded it by a wide margin – the draw was to 2520 as I suggested back in December based upon channel continuation – we hit 2488. Not too far off, if it is indeed complete for this move.

We never had a pullback – it may well have finally arrived.

During 2015 & 2016 – August served as retracement month for the Broad Indices. Will August of 2017 provide a pullback into support?

We will know shortly – we broke the longs on the sideways consoldiation trade. There is the potential for a new measured move from Lows to Highs.

Resistance is 2475 – with 2478 as the 12 tick overhead absolute.

We have broken a number of technical Longs on the YM as well… a break of trend and failed the series.

The Dollar remains above the absolute support @ 91.88, but remains a very Negative setup – The Yen is straddling the 111s with 109s on deck.

The NQ is no different – same rules apply.

Shorts will chase the swoon down, setting up the next short at the  new draws off the bottom – I will complete those when available.

The Crude Oil inventory will set the trade going forward – resolution of consolidation – up or down.

The DX/JPY is within its fifth week of spreading. Last week was a large consolidation. Overnight we sold off… leading us back to 109.50 & 109.35.

110.25s would be the next entry into the trend.

Gold & Silver continue to rally inside of their longer term trends – 1288/91 and 1338 are in play. The overnight daily draw hit to the tick off the 6/6 highs to the 7/7 lows.

I’ve had to flip at this juncture and reverse the trade. There is no short trade, not yet. It’s been blown out and when the market moves against your thesis – you obey.

Everything is about to flip – this is the markets message.

Every week we have rallied into the close of the week – the one exception – last week. Support levels traded while the DX/JPY found support. Gold & Silver retest the 38.2% and 50% Short. The resistance levels are DX/JPY – we need to watch the pair closely for pullbacks that lead to new highs and higher yearly highs.

Silver is breaking up, the next measured long would trade off a retracement – by the numbers.

The Bond Market has been defending Long setups for Six Months… a pullback is to be expected – then resumption of the trend.

Everything is about to change – we need to adapt and obey.

 

ECN Data 2Day

Important Data released today and Friday bares close scrutiny. It will shape action into Fridays session.

7:00 AM ET

MBA Mortgage Applications

8:15 AM ET

ADP Employment Report

10:30 AM ET

EIA Petroleum Status Report

Yellen will be uttering her words of wisdom on QT later today – indicating timing of normalization as well as tightening for December.

Friday we will see ADP Employment and Trade Data.

Monday is a Full Moon.

 

IMF says Dollar overvalued; Euro, Yen, Yuan broadly in line with fundamentals

The International Monetary Fund on Friday said that the U.S. dollar was overvalued by 10 percent to 20 percent, based on U.S. near-term economic fundamentals, while it viewed valuations of the euro, Japan’s yen, and China’s yuan as broadly in line with fundamentals.

The IMF’s External Sector Report – an annual assessment of currencies and external surpluses and deficits of major economies – showed that external current account deficits were becoming more concentrated in certain advanced economies such as the United States and Britain, while surpluses remained persistent in China and Germany.

While the report assessed the euro’s valuation as appropriate for the eurozone as a whole, it said the euro’s real effective exchange rate was 10-20 percent too low for Germany’s fundamentals, given its high current account surplus.

Britain’s pound, meanwhile, was assessed as up to 15 percent overvalued compared to fundamentals, which include a high level of uncertainty over Britain’s post-Brexit trading relationship with the European Union.

The Fund said the dollar’s appreciation in recent years was based on its relatively stronger growth outlook, interest rate hikes versus looser monetary policy in the eurozone and Japan, as well as expectations for fiscal stimulus from President Donald Trump’s administration.

But so far this year, the dollar index, .DXY the broad measure of its value against other major currencies, is down more than 8 percent this year and is off to the worst start to a year since 2002.

The IMF recommended that U.S. authorities take steps to shrink a current account deficit that remains too large, by reducing its federal budget deficit and passing structural reforms to increase the savings rate and improve the economy’s productivity.

“It’s important to address imbalances, because if they’re not dealt with appropriately and through the right policies, we could have a backlash in the form of protectionism,” IMF Research Division Chief Luis Cubeddu told a news conference.

Cubeddu said that the persistence of current account surpluses in export countries such as China and the growth of deficits in debtor countries such as the United States suggested that the problem would not clear up automatically.

“That is, prices, savings and investment decisions don’t seem to be adjusting fast enough to correct imbalances. This partly reflects rigid currency arrangements, but also certain structural features, like inadequate safety nets, barriers to investment, which leads to undesirable levels of savings and investment,” he said.

The report said that while China’s yuan was broadly in line with its fundamentals, IMF models showed wide divergences with desired policies from a 10 percent overvaluation to a 10 percent undervaluation due to uncertainties over Beijing’s policy outlook.

The U.S. Treasury in April refrained from declaring China a currency manipulator despite Trump’s campaign promises to do so, citing Beijing’s interventions last year to prop up the yuan’s value in the face of capital outflows. But it kept China, South Korea, Taiwan, Germany and Switzerland on a monitoring list for large external surpluses.

The IMF said China’s current account surplus was growing again after declining in 2015 and 2016 and needed to be reduced. This should be achieved by rebalancing the economy away from investment and credit growth toward more consumption, with a stronger safety net, reforms to state-owned enterprises and opening Chinese markets to foreign competition.

The report also showed that the IMF considers Mexico’s peso and South Korea’s won both to be undervalued by 5-15 percent compared to their fundamentals. The Fund said it expects Mexico’s undervaluation to reverse as risks of protectionist U.S. policies dissipate, but South Korea needed to stimulate domestic demand to reduce a large current account surplus.

Reporting by David Lawder; Editing by Nick Zieminski, Bernard Orr – Reuters

*** The IMF is run by the ESF… consider this message track carefully.

Unravelling Velocity

The West’s authority will see another percipitous leg down.

US global hegemony, once again – is being kicked down the stairs by China and Russia.

All roads lead East as “Alternatives” have been put in place to the existing “World Order.”

Over a decade of positive trade balances resulted in imbalances and the hoarding of foreign exchange reserves, namely US Dollars.

Transparency, responsibility and respect for the Renminbi are the   purported aspirations. China’s campaign to include the Renminbi among the currencies of the basket that is used to value special drawing rights (SDR) and to set its interest rate is sowing rewards – namely Bond Connect.

Chinese Monetary Authorities have worked diligently to get out from under US control with their creation of the New Silk Road – Alternatives to the IMF, World Bank, and SWIFT system are well established.

The Asian continent, the Mid East and Africa and parts of Europe support their efforts as US hegemony has worn thin.

The US Treasury Market has lost its Global dominance – falling from 62% to 35% in a few short decades. It’s been a slow burn, but one that is about to gain immense momentum later this year.

Are you positioned for this untoward outcome.

I dearly hope so, the trend is your friend and it’s about to get sporty as the upcoming gyrations will indicate the exits are narrowing. A final push to levitate will induce a mass exodus.

 

The Credit Cycle

When the Fed raised its key rate from a record low back in December 2015 – a change in trend was assured. This trend is not about to change, irregardless of the numerous protests the Federal Reserve is bluffing. They are not – Domestic Policy initiatives favor Capital Inflows to the United States. Inflows have remained robust.

The dollar should rise, but is struggling. How long this period of consolidation for the DX continues is curious. It has the appearance of being extremely weak. 93 remains our target for the DX, this could provide immense support or a spectacular failure – one that, should the DX fail,  returns the Dollar to the 70s on an exchange basis.

The Federal Reserve has kept their word, for them to sit pat – continued asset inflation would be difficult. This appears counter-intuitive, it is not. Continued Zero Interest Rate Policy served its purpose until it was no longer effective. The pendulum is swinging back. Much has been made of calling the Fed on their bluff… 3 increases to the Fed Funds Rate later and there is no sign they are about to halt and reverse direction.

Mario Draghi and the European Central Bank will come under pressure in maintaining negative interest rates that have failed to reinvigorate the European economy. 8 years of economic policy has failed spectacularly and would seem to demand Europe’s pendulum begin to swing back to rate normalization.

The note of caution by Federal Reserve Board members have not deterred 25 basis point rate hikes – economic activity has contracted significantly since they began raising rates.

What is to lead us to believe they are about to reverse course?

The small gang of “Forecasters” who couldn’t shoot straight from the inception of this change in trend?

The Fed’s flip-flop – good cop, bad cop routine?

Economic contraction – did this prevent them from prior increases?

The Dollar will begin to drop when the European Central Bank begins to reverse course – until then it will either tread water above 93 or fail dramatically to the 70s once we have a clearer picture from Euroland.

I remain negative on the PM Complex, this most recent retracement is weak, underwhelming and has the appearance of building stored energy for the next decline. For things to look up would require Gold to remain firmly above 1237 for 5 to 10 trading days. Silver will require a move over 16.50 – one that hold for the same timeframe. Were Purchasing Power Parity truly at risk of a serious decline, Silver would be leading.

It is not – is this a trick, a distraction or a ruse?

We will find out shortly.