Ranges Continue to Narrow

Ample Liquidity dulls market

Yesterday’s budget speech from U.K. Chancellor Philip Hammond was relatively upbeat in that he predicted growth for 2017 to be 2% and for inflation to peak in mid-2017 at 2.4%.

He did all the normal things but caused widespread consternation by raising the tax burden of the self-employed. It will be a pity if this rumbles on as it will be a distraction from the job at hand which is a smooth start to the Brexit negotiations once Article 50 is triggered.

Sterling traded in a 65-point range. These narrow ranges are becoming the norm across all currency pairs as liquidity continues to flood the market. This protects day traders who are able to place tight stops with inflection points nearby. The downside is that when liquidity disappears and the market is left unprotected, a 300 or 400 move will destroy small traders.

A move like Brexit or the SNB removing the peg is such a rarity that the market is lulled into being secure with narrow ranges becoming increasingly unprepared for an unruly move.

Industrial production in Germany rose by 2.8% in February, a little more than market expectation. This add to the inflationary pressures being experienced by Germans but cannot influence today’s interest rate decision for the ECB.

The ECB Board which meets today is charged with providing stable growth and inflation conditions for the whole region and individual countries’ economies whilst of academic interest, cannot influence the decisions of the Central Bank.

The diversity of the 19 member states is not quite comparable with the 50 states of the U.S. but the principle remains the same. Data releases in the U.S. are on a Federal level and no account is taken of the issues faced by individual states where the economies are driven by weather as well as the more traditional economic factors.

Yesterday’s release of the ADP report on private sector employment showed a rise of 298k jobs created in February, an increase of 14% over January. This report had been discounted as being inaccurate and having no bearing on the non-farm report but a tightening of the parameters in October last year has given the report greater significance and it is now considered a reasonable barometer of the market.

This points to a 200k+ non-farm report which finally cement the rate hike that is to be announced next week.

China announced inflation data overnight and while it is virtually impossible to produce timely accurate data in such a huge and diverse economy without the infrastructure of the U.S., the trends of data which is gathered in the same way month after month provides markets with a picture of the way the economy is growing.

Consumer prices fell by 0.2% in February which contributed to a YoY gain of just 0.8%. Having produced a trade deficit in February, in is clear the Chinese economy continues to be “inscrutable”.

Apart from the U.S. jobs report, the Bank of England will release its report on consumer inflation expectations tomorrow. It is likely that consumer will expect inflation to rise to 2.8% in a year’s time which is higher than the Chancellor predicted in his budget yesterday. Traders must weigh the Government’s “rose coloured” expectations with those of the man in the street to decide which call is correct.