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'Dovish' Data Reversing Rates And The Dollar

Thursday,May 10, 2017, 10:45 AM, EST

  • NASDAQ Composite+0.61%Dow+0.58%S&P 500+0.55Russell 2000+0.41%
  • NASDAQ Advancers:1231Decliners:898
  • Today's Volume (vs. yesterday)-5.89%

U.S. equity markets are trading higher, building on yesterday's strong session and following solid economic data released this morning. Both unemployment numbers and inflation data showed a healthy economy with strong underlying fundamentals. Earnings, continued M&A chatter, corporate buybacks and stronger oil are all helping to keep this market moving. Currently all 11 S&P 500 sectors are trading higher with HealthCare and Tech the best performing sectors. Crude oil is slightly lower after making a multi-year high yesterday. Gold is higher on geo-political issues, while the dollar is lower and the yield on the 10-yr decreased to 2.9622%.

  • Unemployment numbers released today again show that labor is still in demand in the U.S. as weekly initial jobless claims were lower than economists' forecast. According to the U.S. Department of Labor, reported Initial Jobless Claims for the week were 211,000 for the 2 nd week in a row vs polled expectations of 219,000. Continuing Claims were also lower at 1.790 million vs polled expectations 1.800 million. Initial jobless claims continue to linger near all-time lows, indicating that employers are having a hard time finding skilled labor.
  • U.S. Consumer Price Index rose slightly in April moving up 0.2% vs economists' expectations of a 0.3% increase.  Core CPI (ex food & energy) rose 0.1% for April which is also slightly below economists' predications of a 0.2% gain. The 12 month inflation rate rose to 2.5% in-line with expectations and its highest reading in 14 months. Yet the Core 12 month CPI rose only 2.1%, holding steady with last month's reading and below polled expectations of a 2.2% increase. This is a good sign that the inflation fears may be a bit overstated and help the FOMC with their decision to raise interest rates at their June meeting. The probability of the FOMC raising interest rates in June now stands at 72%.
  • The "fear index" as the CBOE's volatility index is known, dropped again yesterday putting it on a steady course to close at its lowest level in 3 months. The VIX fell to 13.42 for its 5th straight day of declines settling at its lowest level since January 26th. It has dropped 38% over the past month as equities have steadily risen (Dow +2.4%, S&P +3.2, Nasdaq Comp +5.6%). However the VIX remains up about 22% in 2018, although it is well below its long-term average between 19 and 20.

Technical Take:  "Dovish" Data reversing Rates and the Dollar

This week markets received monthly inflation data starting with yesterday's PPI and today's CPI both of which came in below forecasts just as major asset classes are testing critical technical levels.  The reduced inflation readings led to a "dovish" reaction whereby rates and the US dollar pulled back from their recent strength.  The 10-year yield topped out at 3.01% yesterday, just 2 bps shy of its YTD high, 3.03%, made just two weeks earlier on April 25 th .  Two days before that April 25 high, we noted in the MID BLOG that while many were looking to 3% as the key "breakout" level, 3.05% was much more important given its role as the trigger of a large, multi-year "double bottom" reversal pattern which potentially represents the end of a 35 year secular decline in rates.  That's a big deal and thus it should come as no surprise if there is a lengthy amount of consolation before the long yield can get break through it.

And while the US dollar index (DXY) is currently on pace to finish in the green for the 12 th time in 15 weeks, it is showing signs of exhaustion as it approaches a major resistance level.  Yesterday the DXY formed a bearish doji topping pattern, following a steep uptrend, just as the daily RSI reached an extreme 78 reading indicating buyer exhaustion.  This is being confirmed by today's "bearish engulfing" candlestick, while the more important weekly pattern is forming a bearish "shooting star" topping pattern.  The location of the "shooting star" is critical, as the DXY is carving out this topping pattern along a major resistance level, ~93, which represents a prior multi-year support line spanning Q2'15 through Q3'17.  Prior support, now resistance, combined with reversal patterns on multiple time frames, and overbought/buyer exhaustion readings on the daily period suggests the three month uptrend in the dollar may be on the cusp of transitioning to consolation, if not an outright downside reversal.

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Nasdaq's Market Intelligence Desk (MID) Team includes:

Charles Brown is Associate Vice President on The Market Intelligence Desk with over 20 years of equity capital markets experience. Charlie has extensive knowledge of equity trading on both floor and screen based marketplaces. Charlie assists with the management of The Market Intelligence Desk and works with Nasdaq listed companies providing them with insightful objective trading analysis.

Steven Brown is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq with over twenty years of experience in equities. With a focus on client retention he currently covers the Financial, Energy and Media sectors.

Christopher Dearborn is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq. Chris has over two decades of equity market experience including floor and screen based trading, corporate access, IPOs and asset allocation. Chris is responsible for providing timely, accurate and objective market and trading-related information to Nasdaq-listed companies.

Brian Joyce, CMT is a Director on the Market Intelligence Desk (MID) at Nasdaq. Before joining Nasdaq Brian spent 16 years as an institutional trader executing equity and options orders for both the buy side and sell side. He also provided trading ideas and wrote technical analysis commentary for an institutional research offering. Brian focuses on helping Nasdaq's Financial, Healthcare and Transportation companies, among others, understand the trading in their stock. Brian is a Chartered Market Technician (CMT).

Michael Sokoll, CFA is a Senior Managing Director on the Market Intelligence Desk (MID) at Nasdaq with over 25 years of equity market experience. In this role, he manages a team of professionals responsible for providing NASDAQ-listed companies with real-time trading analysis and objective market information.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.