Sample Category Title

Key Points:

• Post-breakout rally running out of steam.
• ABC wave could be taking place.
• Technical bias remains bullish in the medium to long-term.

Following its breakout from that falling wedge, the USDCAD has absolutely been on fire and has now moved all the way back to the 1.3356 mark in only a handful of sessions. However, the pair may need to cool off in the near-term given some mounting resistance to the recent bullish phase. As a result, it's worth taking a look at some of the technicals to form a bias moving forward.

Firstly, we need to establish whether the Loonie's momentum has run dry or if we are instead going to see further gains moving ahead. Well, as shown on the daily chart below, the rally seems to be stalling somewhat as it approaches the 1.3356 level which, coincidently, happens to be the 61.8% Fibonacci retracement. Combined with a highly overbought stochastic reading, the probability of seeing a reversal to the downside is looking fairly good which could have some interesting implications for the pair.

Indeed, moving into a decline could mean that we are in the early stages of a corrective wave formation. Specifically, an ABC wave could be on the horizon and this would broadly be in line with the Loonie's long-term technical bias. Of course, we will need some more confirmation before committing to this forecast and this would come as a result of seeing the near-term downtrend reach the 1.3214 mark and subsequently reversing.

At the 1.3214 level, support should kick in strongly, hence the rather early suggestion of a corrective ABC wave. This support would largely be a result of the 38.2% Fibonacci retracement and the 100 day moving average which should, at its current trajectory, provide some dynamic support around this price. All going according to plan, this will inspire a reversal to the upside and the completion of a ‘C' leg that could extend all the way to the 1.3470 mark.

Ultimately, there seems to be a rather solid chance of a seeing this ABC wave take hold in the imminent future. More precisely, the combination of both strong bullish and bearish sentiment alongside the robust zones of support and resistance should result in the desired price action. Whether gains extend beyond the forecasted end of the pattern is anyone's guess but, if they do, it could mean we are faced with an Elliot wave capable of seeing the upside of the channel challenged. As a result, the Loonie could certainly be worth keeping an eye on moving ahead.

As widely anticipated, BOC kept its monetary policy unchanged with the overnight rate at 0.5%, the Bank rate at 0.75% and the deposit rate at 0.25%. The central bank acknowledged that both global and domestic economic indicators were consistent with its projection of improving growth laid out in January. It also note Canadian growth in 4q16 came in 'slightly stronger than expected'. However, policymakers maintained a cautious tone noting that 'material excess capacity' remained and that the central bank is 'attentive to the impact of significant uncertainties weighing on the outlook'. Therefore, the risks and slacks in the economy justified leaving the policy rate at exceptionally low level.

In the discussions of economic developments, BOC remained wary that 'exports continue to face the ongoing competitiveness challenges described in the January MPR'. It added that despite improvement in the employment situation, 'subdued growth in wages and hours worked continue to reflect persistent economic slack in Canada, in contrast to the US'. The central bank also reiterated its vigilance over 'significant uncertainties' and risks weighing on the outlook. We believe one of the biggest uncertainties and risks facing Canada is the new US administration tax and trade policies.

US President Donald Trump failed to surprise the market at his State of the Union address earlier this week. While he reiterated that plans to make historic tax reforms and increase infrastructural spending worth of as much as US$1 trillion, the details are lacking. On tax reform, Trump indicated that his team 'is developing historic tax reform that will reduce the tax rate on our companies so they can compete and thrive anywhere and with anyone' and would also 'provide massive tax relief for the middle class'. Although the fact that Trump had not specifically mentioned border adjustment tax (BAT) at the joint session address might diminish the chance that such tax would be implemented, the risks cannot be ruled out. We believe Canada would be seriously affected if BAT is enacted given the close US-Canada trade relations.

According to the US trade office, Canada is US' second largest goods trading partner (after China) with US$575B in total (two way) goods trade during 2015. The market would be closely watching the detailed tax plans, scheduled for release in coming weeks, to see if BAT would be adopted. If yes, if key Canadian exports, i.e. energy, would be exempted from the new tax.

Indeed, there are several scenarios that could happen to the new US-Canada trade relations. In case BAT is adopted, Canada's export-reliant economy would be severely affected. We expect Canadian dollar to fall around 5% against US dollar. BOC would turn even more dovish, making further rate cut possible. However, if BAT is adopted with exemption in the energy sector, BOC would remain cautious, monitory the impact on non-energy exports. However, policymakers would be less urgent to cut rates further. The best scenario for Canada is no BAT in US' new tax reform plan. In the case, BOC would likely change to a more neutral tone from the current dovish one. The chance of a BOC rate hike in late-2017 is also increased.

STOCKS

Markets react positively to the Trump speech yesterday. Almost all indices are trading higher and looks potentially bullish for the near term except Nifty which is trading at crucial levels and is yet to decide on near term direction.

Dow (21115.55, +1.46%) has risen sharply breaking above the immediate resistance on the 3-day candles. Now there is high potential on the upside towards 21300-21600 in the near term. Upward rally may continue in the coming sessions.

Dax (12067.19, +1.97%) has finally moved up sharply to test our early target of 12000. It could continue to move up towards 12200 before seeing a pause.

Nikkei (19643.62, +1.29%) has broken from the contracting phase to move on the upside and while that sustains, it could rally towards 20000 in the near term. This has negated our expectation of an initial fall and could take up Dollar-Yen to higher levels in the near term.

Shanghai (3240.00, -0.21%) is trading slightly lower today but overall is contained within the near term uptrend. While above 3225, there is scope of an up move towards 3275-3300 in the medium term.

Nifty (8945.80, +0.75%) is trading just below the crucial resistance levels and seems to be consolidating for a few sessions now. We would still expect a corrective dip in the near term unless a confirmation above 8960-9000 levels is seen. A break above 9000, if seen could turn very bullish for the coming weeks.

COMMODITIES

Gold (1247) was almost unchanged and hovering around the pivot (1246) of its trading range of 1217-1274. Recent strength in dollar index (101.89)could drag the yellow metal towards 1217. A close below 1230 could also hamper its recent upward momentum.

Silver (18.32) is holding its crucial support of 18, and we will remain bullish until it is holding the same. Defiantly the bullish momentum become weak and a possibility of a decline towards 18 levels can’t be ruled out. A close below 17.80 could be trend reversal.

Copper (2.74) is trading around its pivot of 2.75 of its recent trading range of 2.60-83. It is holding its upward trend line support at 2.65-68 since October 16. We have US Unemployment data at 7.00 p.m IST, which could influence the price of copper and silver.

Brent (55.560) and WTI (53.74) both are trading within their narrow ranges of 55-56.10 and 53-5461 with no directional bias. Surplus of 0.6M barrel in US weekly crude oil inventory (1.5M) has impacted negatively on the prices.

FOREX

Major currencies (except Aussie) weaken on fresh Dollar strength post the Trump speech. This may continue for some sessions before a small pause is seen.

Dollar Index (101.90) could face immediate resistance near 102 which if breaks on the higher side could turn bullish towards 103. We need to watch price action near 102 which would decide immediate movement in the other currencies. A recovery from 102 would bring back strength in the major currencies in the next few sessions.

Euro (1.0535) may test 1.05 in the near term. In case that holds, we could see a bounce back towards 1.055-1.06; else downside potential is open towards 1.040-1.035 for the long term.

Dollar-Yen (114.035) has broken the immediate resistance near 113.75 and is headed higher for the coming sessions. The upside break on Nikkei and the strength in Dollar has lead to Yen weakness and while the Nikkei looks bullish for the near term, Dollar-Yen could head towards 114.50-114.80 soon.

Pound (1.2278) has fallen in line with our expectation breaking below our immediate target of 1.23. While the US-UK 10Yr differential continues to fall, the Pound could be headed towards 1.2100-1.2085 levels in the near term. (Refer to Interest Rates section below)

Aussie (0.7656) is stuck within the 0.7600-0.7750 region and could continue to remain so in the near term. While support at 0.7625 holds, we may expect a rise in Aussie towards 0.7700-0.7720 levels.

Dollar-Rupee (66.8250) could face immediate resistance near 66.95/90 which if holds could keep the currency pair ranged within 66.65-66.85 region. Overall broad range of 66.50-66.95 may hold for the next few sessions.

INTEREST RATES

The German-US 2Yr (-2.14%) has bounced back a bit from levels near -2.21% seen yesterday. If the bounce manages to take the differential towards -2.10% or higher, it could indicate that the Euro is likely to bounce back from 1.05 levels. Note that the German-US 10YR (-2.18%)is headed lower and may take some time to bounce back. Medium term trend for the yield-differential looks bearish.

The US-UK 10Yr (-1.28%) has been clearly indicating a fall in the Pound since the last few days which has reflected in the currency yesterday. Unless the differential starts moving up, it would be difficult for the Pound to rebound from current levels.

The US yields continue to rise sharply. The 10YR (2.46%) and the 30YR (3.06%) are trading just near immediate resistance and while those holds, we may expect a dip in the near term. A break above 3.10% (on the 30Yr yield) and 2.5% (on the 10yr yield) could turn very bullish for the medium term.

The German yields have bounced from immediate support levels and could move higher for some time before seeing a pause.

EUR/USD

Late Wednesday, US President Donald Trump speaking before the Congress and a couple of FED speakers in separated events, gave the greenback and equities a boost, sending Wall Street to record highs. The EUR/USD pair plunged to 1.0513, but the dollar's buying euphoria eased in the US afternoon, with the pair recovering up to the 1.0560 region, where it stands by the end of the day. Demand for USD-linked assets was triggered by a conciliatory tone of the new US president when addressing to policy makers, pretty much reiterating his campaign pledged, without getting into much details. What actually backed the rally was a confirmation that tax cuts will reach also corporations, and not only the mid-class, and a $1 trillion plan for infrastructure investment.

In the data front, EU final Markit manufacturing PMIs for February, confirmed the growth path the area got into last December as the index came at 55.4, up from 55.2 in January, its highest in almost six years, although below market's expectations of 55.5. In Germany, growth reached its highest level since May 2011, with the PMI up to 56.5 from January's 56.4, while inflation jumped above 2.0% in the country, for the first time since August 2012. German headline came in at 2.2% YoY in February versus 1.9% YoY in January. Finally in the US, Core PCE inflation surged to 1.9% in January, from previous 1.6%.

From a technical point of view, the EUR/USD pair presents a moderate bearish risk in the short term, given that in the 4 hours chart, the price settled below all of its moving averages, with the 20 SMA just a few pips above the current level, and technical indicators recovering some ground within bearish territory. The lower low for the week also favors additional declines as long as the prices remains below the 1.0600 level, and with a break below 1.0520 required to confirm further declines.

Support levels: 1.0590 1.0565 1.0520

Resistance levels: 1.0635 1.0660 1.0710

USD/JPY

The USD/JPY pair advanced up to 114.04, its highest since mid February after trading as low as 111.68 on Tuesday, on renewed optimism the new US administration will boost growth and inflation, and following comments from several US FED officers, which lifted odds for a March rate hike up to 80%. In separated events, San Francisco Williams and New York Dudley signaled that a rate hike is on the table, on accelerating inflation and employment at its best level in years. The rally triggered by US President Trump in stocks fueled the advance of the pair, although the upward momentum eased in the US afternoon, with the USD/JPY pair now trading around 113.50. News coming from Japan were encouraging, as the Nikkei Manufacturing PMI continued to expand in February to 53.3 from January's 52.7, marking the highest reading since March 2014. Also, supporting the rally in the pair was a sharp comeback in US Treasury yields that are still the main motor for the JPY. If yields retreat from their recent highs, the pair will likely follow-through. Technical readings in the 4 hours chart indicate that the pair may correct lower, as indicators are retreating strongly from overbought levels, but the price has recovered above its 100 and 200 SMAs, with the largest at 113.30, and offering an immediate support. The risk will turn towards the downside in the short term, on a break below 113.00.

Support levels: 113.00 112.50 111.95

Resistance levels: 114.00 114.40 114.85

GBP/USD

The GBP/USD pair fell to its lowest in six weeks, printing 1.2280 early US session, as a soft UK Markit manufacturing PMI pushed the pair below February's low, triggering stops and fueling the slide, later backed by US FED's favorite measure of consumer prices, the PCE price index that climbed to 1.9% from a year earlier, not far from the 2% percent target that was last met in April 2012. The UK manufacturing sector index in February printed 54.6, its lowest in three months. The Pound came under pressure earlier this week on speculation that Scotland will try to leave the UK after the kingdom opted for a hard Brexit. Now trading around 1.2300, technical readings maintain the risk towards the downside after the bearish breakout of February's range. In the 4 hours chart, the 20 SMA has accelerated its slide, currently around 1.2410, while technical indicators have lost downward momentum, but remain well into negative territory. The pair has its next relevant support at 1.2260, the 61.8% retracement of the January rally, with little in the way below it, until 1.2100.

Support levels: 1.2260 1.2225 1.2170

Resistance levels: 1.2345 1.2390 1.2440

GOLD

Gold fell to $1,236.83 a troy ounce intraday, as increased chances of a FED March hike weighed on the commodity. The metal bounced, however, as dollar's demand eased mid American afternoon, ending the day around 1,246.90, pretty much flat. Despite spot set a lower low and a lower high daily basis, the dominant bullish trend has been barely affected, white surprising considering odds for a March hike rose to around 80%. That said, it will take the slightest dovish comment from any FED officer to see the commodity recovering its shine. From a technical point the daily chart shows that the price bounced strongly after testing its 20 DMA, while the Momentum indicator resumed its advance within positive territory, and the RSI indicator also turned south after correcting overbought conditions. In the 4 hours chart, the price bounced from a bullish 100 SMA, although a bearish 20 SMA caps the upside whilst technical indicators have recovered within negative territory, maintaining their upward slopes, but still not enough to confirm further gains. A recovery above 1,255.25, the 61.8% retracement of the post-US election decline, however, will likely see the metal testing its recent highs around 1,263.80.

Support levels: 1,238.90 1,230.00 1,222.10

Resistance levels: 1,255.25 1,263.80 1.273.20

WTI CRUDE

Crude oil prices ended the day marginally lower, with West Texas Intermediate futures closing at $53.79 a barrel, weighed by news that US stockpiles inched higher for an eighth consecutive week, although the decline was limited, as the build was smaller-than-expected. According to the EIA, the country added 1.501M barrels last week, against expectations of 3.079M. Commercial stockpiles stand at 520.2 million barrels, exceeding the seasonal maximum. WTI has continued to make no progress from the technical point of view, stable above a horizontal 20 DMA in the daily chart and with technical indicators hovering around their mid-lines, lacking directional strength. In the 4 hours chart, the price has settled below a modestly bearish 20 SMA, but above a flat 100 SMA, whilst technical indicators lack directional strength slightly below their mid-lines. The commodity will likely continue in its 50/55 range, with increasing bearish odds coming from the macroeconomic background.

Support levels: 53.40 53.00 52.50

Resistance levels: 54.75 55.30 56.00

DJIA

After closing in the red on Tuesday, US equities rallied to all-time highs late Tuesday, as the "Trump-trade" came back to life following US president speech before the Congress. The DJIA traded as high as 21,016 ahead of Wednesday's opening, ending the day at 21.115.42, up by 303 points or 1.46%. The index set a record high intraday of 21,168. The Nasdaq Composite and the S&P also closed at record levels, with the first up 1.35%, to 5,904.03, and the second adding 1.37%, to 2,395.95. Financials were among the best performers worldwide, and within the Dow, JPMorgan Chase led gainers, up 3.47%, followed by American Express that closed 2.39% higher. Wall-Mart changed course and was the worst performer, ending the day 0.72% lower. Technical readings in the daily chart have accelerated their advances within extreme overbought levels, with the RSI indicator currently at 88, yet a downward corrective move remains unlikely for now, as market sentiment favors additional advances. In the shorter term, and according to the 4 hours chart, technical indicators retreated within overbought levels, but the benchmark is far above its moving averages, maintaining the upside favored.

Support levels: 20,779 20,724 20,668

Resistance levels: 20,855 20,900 20.940

FTSE 100

The Footsie rallied pass February high, and ended at record highs, as equities' traders worldwide cheered Trump's words late Tuesday. A weaker Pound added to the FTSE 100 advance that managed to close at 7,382.90, up daily basis by 121 points or 1.64%. Persimmon led advancers, adding 5.91% while Ashtead Group followed, ending the day 5.74%. Mining-related equities, however, closed in the red as gold fell sharply intraday, with Randgold Resources shedding 2.69% and Fresnillo 0.87%. The daily chart shows that the upward potential increased, as technical indicators turned higher after several days of consolidating within positive territory, and extended far above all of its moving averages. In the 4 hours chart, technical indicators pulled back modestly within overbought territory, but the index is also above all of its moving averages, with the 20 SMA gaining upward strength, all of which supports additional advances on a break above 7,397, the intraday high.

Support levels: 7,238 7,195 7,160

Resistance levels: 7,285 7,315 7,342

DAX

The German DAX surged by whopping 237 points or 1.97%, to close the day at 12,067.19, level last seen in April 2015. Strong local data supported the rally, as German's inflation is expected to be at 2.2% in February according to preliminary estimates, whilst the German manufacturing PMI reached its highest level since May 2011 in February according to Markit, up 56.8 from 56.4 in January. All components closed in the green, with banks leading the way higher, as Deutsche Bank added 5.31%, while Commerzbank gained 4.13%. The daily chart for the benchmark shows that it stands some 20 points above the mentioned close, having extended well above a bullish 20 DMA after failing to break below it, whilst the RSI indicator heads sharply higher around 68, and the Momentum indicator also turned higher, all of which supports some further gains ahead. In the 4 hours chart, technical indicators have partially lost upward momentum, but remain in overbought territory, whilst the index is also developing far above all of its moving averages, supporting the longer term perspective.

Support levels: 12,031 11,982 11,938

Resistance levels: 12,100 12,148 12,183

Near term US 10 year note yield outlook:

The market has indeed continued to chop in that 2.31/64% range that has been in place since Dec 15th, still seen as a large correction (potential triangle/pennant, continuation pattern) and with eventual new highs after (see in red on daily chart below). Note that the sloppy/messy trade since Dec adds to the view of a triangle (characteristic), while the resolution higher may be rapid (triangles often resolve sharply). On a near term basis, there remains some risk for a further period of ranging before resolving higher (see in red on daily chart below). Nearby resistance is seen at the bearish trendline from Dec/ceiling of the triangle (currently at 2.50/52%) and that Dec 2.64% high. Support is seen at the 2.29/31% with a break/close a bearish sign and aborting this bullish view. Bottom line: rangy trade from the Dec high at 2.64% seen as a correction (poss triangle), suggests eventual upside resolution (potentially sharp).

Strategy/position:

Reached the buy target from the Feb 22nd email at 2.34% (.02 above the base of the triangle) on Feb 24th and for now, would continue to stop on a close below 2.28%. However will want to get more aggressive on an upside resolution of the triangle to maintain a good risk/reward in the position.

Long term outlook:

Very long term, the market continues to chop near the middle of the 1.32/3.05% range that has been in place since June 2012 and as been discussing, the 3 wave decline from the Jan 2014 high at 3.05% to the July 6th low at 1.32% (A-B-C) argues a large "complex" correction. Note that the increasing likelihood of another upleg above 2.64% (see shorter term above) argues a huge "flat" type correction and ideally with eventual gains back to that 3.05% high (and even temporarily above). For those familiar with Elliott Wave analyses, "flats" break down to a series of 3-3-5 waves and explains and fits that 3 wave decline to new lows at 1.32% on July 2016. As noted above, a break/close clearly below 2.28/31% would abort the view of this triangle and in turn put this longer term bullish view also on hold. Bottom line : more bullish scenario discussed over the last few months (gains to Jan 2014 high at 3.05%) has become more likely as the action from Dec is seen as a large correction (triangle/pennant).

Strategy/position:

Also switched the longer term bias to bullish on Feb 24th at 2.34% and would continue to use the same exit as the shorter term above (down resolution of the triangle since Dec).

Current:

Nearer term : reached target from Jan 22nd email at 2.34% on Feb 24th. .
Last : short Feb 2nd at 2.47%, took small profit Feb 22nd at 2.42%s (.05 profit).

Longer term: bullish bias Feb 24th at 2.34% for a potentially rapid move to 3.05%.
Last : bear bias Nov 23rd at 2.54% to neutral Jan 13th at 2.40%.

USDJPY - The pair took back its intra day losses on Tuesday and followed through higher on a rally during Wednesday trading session. On the downside, support comes in at the 113.00 level where a break if seen will aim at the 112.50 level. A cut through here will turn focus to the 112.00 level and possibly lower towards the 111.50 level. On the upside, resistance resides at the 114.00 level. Further out, we envisage a possible move towards the 114.50 level. Further out, resistance resides at the 115.00 level with a turn above here aiming at the 115.50 level. On the whole, USDJPY looks to extend its upside pressure.

Investors were sponging up the plethora of suggestive Fed commentary overnight, President Trump's State of the Union speech, and a profusion of economic data. They left the 20,000 Dow Jones level in their rear view mirror, breaching 21,100 as the market latches on to Trumpflation, despite the President's address coming across about as clear as dishwater concerning actual policy. Regardless, there was enough meat on the bone to content the street with financials, powering their way higher supported by the prospect of stronger US economic growth. As for the dollar, Fed speaks guided the markets and lifted the pricing for a March rate hike to 75% probability and the US 10 Year bond yields have ratcheted higher, nearing in on the 2.5% level.

Australian Dollar

Strong Aussie data with GDP, 1.1% QoQ 0.3% higher than expectations, along with buoyant China PMI data has lent support to the AUD. Even more impressive was the Aussie dollar gains that came as US 10 year yields ratcheted higher to 2.47 % (+.7 %) overnight. The AUD appears poised for another attempt at 0.7700 cents, but the weight of USD demand could prove to be an act of overreaching near term. Indeed, the AUD should remain firm on the crosses, which are still a favoured way for dealers to express their bullish Australia bias. Corporate demand will intensify over the next couple of weeks with dividend buying, likely to keep the AUD supported on dip buying. However, with USD on firmer ground, there is a high chance for a near-term correction lower at some point, with markets flagging Aussie longs and growing weary of the constant rebuffs at .77 level.

The January building approvals missed this morning, coming in at -1.8 % vs. -.5 % expected, and the AUD has fluttered on the data, dropping below the .7650 level.

Base metals continued to flourish overnight in the wake of the stronger China PMI's and President Trump alluding to the 1 trillion US infrastructure proposal, which provided an additional underpin to the AUD.

Japanese Yen

USDJPY is the stand-out legatee of the March rate hike repression as USDJPY remains the market's favourite pair to express a strong USD bias, but demand does appear to be broad-based suggesting the market is still looking to buy more topside exposure. Fed hawkishness underpinned the price action with Kaplan incredibly upbeat and the Beige book evidencing a further compression in labour markets. While the market could pause ahead of

decisive speeches by Fed Vice Chairman Fischer and Chairman Yellen, there appears little reason to talk down March, so the tail risk remains a Hawkish one. No hint of FOMC obfuscation this time around as the FOMC stars are coming together and the 115 now appears to be a bridge not too far to cross.

WTI

Oil traders remained edgy when the EIA Crude Stocks change report was released. The headline number beat the forecasts, but traders were unnerved on the news that a stockpile of 520.2 million barrels was a record. WTI dropped from $54.40 to $53.65 at the close. One has to believe that eventually, the Energy sector will tick higher if the Trump administration's focus is to make America grow again and inventories top out soon.

Offshore Yuan

The CNH continues to trade off its back foot, as expectations ratchet higher for a March rate hike. Despite the positive PMI, CNH continues to be very much driven by the broader dollar landscape.

EM APAC

While Donald Trump has the spotlight, it was the Fed speakers that stole the limelight. Repricing of March rate hike expectations will weigh on regional sentiment, yet the most important detail remains Tax reform. While President Trump sounded unusually placatory yesterday, there were no specifics revealed on the border tax adjustment, but we need to be cognisant that any acceleration of these expectations will give the dollar a boost and should weigh on regional markets in the near term.

Yesterday, I published an AUD/NZD trade idea to look for shorts heading into the Australian GDP number.

AUD/NZD Daily:

The daily chart shows an obvious higher time frame resistance level and as mentioned above, price action up into this zone looks very choppy. You can see the way that price has spiked in and out of the 25 pip zone that I've drawn.

With AUD/NZD sitting at higher time frame resistance and the general downward trend we've seen in the last few GDP numbers, I was obviously playing for a miss on expectations and a drop in price on the back of that.

But…

The print came in WELL above expectation and the Aussie ripped higher on the back of it.

Interestingly, price is still being capped by the top of the daily resistance zone higlighted in yesterday's original trade idea.

AUD/NZD Daily:

This level will continue to be the key as to which way we look to trade the pair.

If price stays under it, then we will look for shorts (or stay in shorts if your stop was still above this higher time frame level).

If price moves above it, then we will look for longs on any short term pullbacks.

The most recent Beige Book for the period between early-January through mid-February indicated that the economy continued to expand at a modest to moderate pace across all regions.

Labor markets were reported to be tight, with some Districts noting widening labor shortages. Employment growth was for the most part characterized as moderate, with three Districts citing modest growth and only two reporting that it was little changed.

Wages in most Districts rose modestly or moderately, with a few reporting some pickup in the pace of wage growth. Wage pressures were particularly felt by engineers and IT workers as a number of Districts noted shortages of these skilled workers.

Price pressures were little changed from the prior report across most Districts. Both selling and input prices were up, with the former up modestly to moderately in some case while the latter was only up modestly. Businesses expect this trend to continue in the months ahead, with modest upward pressure expected in both selling and input prices.

Manufacturing activity accelerated, with most Districts characterizing the pace of growth as moderate. Key measures of activity, such as new orders, production, and shipments were all said to be up in several Districts and the outlook was said to be generally positive. There were also some reports of labor shortages in the sector.

Businesses were generally optimistic about the near-term outlook but to a somewhat lesser degree than in the prior report. Some respondents from the Boston and Dallas Districts cited concern about policy changes in the new administration along with the associated uncertainty.

Key Implications

The Beige Book continues to paint a relatively bright picture of the domestic economy and outlook, corroborating our view of ongoing economic improvement. Most Districts highlighted the manufacturing sector's continued improvement, pointing to a number of activity proxies (new orders, production, shipments, and capacity utilization) that continued to exhibit stronger growth. This morning's ISM manufacturing report for February further corroborates this story, with the index rising for a sixth consecutive month to 57.7 – the strongest expansion on record in well over two years.

The one fly in the ointment was associated with the somewhat lesser degree of optimism reported by business contacts. Respondents also expressed concern about the new administration's policy changes and associated uncertainty. With that said, it should be noted that businesses were still generally optimistic about the near-term outlook and indicators for business sentiment, such as the NFIB's small business optimism index, are holding at very high levels.

• All districts reported modest or moderate economic growth early this year with activity generally increasing across industries.
• Business contacts were optimistic about the near-term outlook, although slightly less so than in the previous report as some cited greater policy uncertainty under the new administration.

Consumer spending growth was characterized as modest while retail sales were more subdued as districts noted an ongoing shift to online sales. Manufacturing activity accelerated, building on an improved assessment in the previous report in which some districts noted conditions took a turn for the better relative to a year ago. Modest growth was reported in the energy sector, in contrast to declines that continued through last year. Housing indicators including construction, sales and prices were generally modestly higher. Commercial real estate activity also grew modestly.

Labour markets were once again characterized as tight and some districts noted greater shortages of labour, particularly for skilled workers. In some cases that was seen as contributing to a pickup in wage growth; otherwise wages generally rose modestly or moderately. Price pressures were little changed, with output prices rising modestly or moderately in most districts but flattening off in a few.

Our Take:

Today's solid Beige Book won't, on its own, convince policymakers to raise rates in March, but a generally positive assessment of economic conditions early this year and further evidence of a tight labour market support the Fed giving serious thought to another hike. There was already a growing consensus among Committee members that further tightening should come sooner rather than later, and a decent run of economic data―most notably upside surprises in the latest employment and inflation reports―and the potential for fiscal stimulus seems to have convinced a growing number that there is little cause for delay. Recent comments to that effect have boosted the odds of a rate hike in March as high as 80% according to Bloomberg. Chair Yellen's remarks on Friday will help firm up expectations for the coming meeting, though at this stage there appear to be few barriers to raising rates.