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U.S. Review

A Slow Start to the Year

• Consumer spending was soft again in February, rising just 0.1 percent for the month while personal income growth remained robust, rising 0.4 percent.
• Consumer confidence data for the month of March continued to indicate that consumers are feeling more optimistic with the current and future economic environment.
• Real GDP growth for Q4 was revised up slightly to 2.1 percent from 1.9 percent.
• Inflation, as measured by the PCE Deflator, edged up to 2.1 percent on a year-over-year basis in February.

A Slow Start to The Year

Economic data this week continued to indicate that first-quarter GDP growth will be soft. Personal income rose a robust 0.4 percent, while personal spending rose a slight 0.1 percent in February. A continued rise in consumer confidence in March, however, may signal that consumer spending might begin to pick up in the months ahead. The third look at GDP growth for the fourth quarter showed that the economy expanded at a 2.1 percent pace to close out 2016. The slight upward revision was attributed to somewhat higher real consumer spending and slightly higher business investment. After taking into consideration data since we published our March monthly forecast, we have downwardly revised our call for Q1 GDP growth. We now expect a 0.5 percent pace of growth, relative to our March monthly forecast of 1.1 percent.

Personal income rose 0.4 percent in February, while January's reading was revised slightly higher to 0.5 percent. After controlling for inflation, real after tax personal income fell 0.1 percent in February. Inflation, as measured by the PCE deflator, continued to edge higher for the month and which supports our call for two more hikes from the Federal Open Market Committee for the reminder of the this year. One of the more disappointing aspects of the personal income and spending report this week was the slight 0.1 percent increase in personal spending. After accounting for inflation, real consumer spending for February fell 0.1 percent after declining 0.2 percent in January. While we await the official Q1 GDP release to single out the reasons for the softness, a downshift in utilities output from the industrial production report for the first two months of the year suggests that consumer spending for services is likely to be light in Q1. In addition, a law change affecting tax fillers who claim the Earned Income Tax Credit and Additional Child Tax Credit delayed tax refunds until Feb. 15th for millions of Americans, which served to slow the pace of consumer spending in January and for most of February.

While consumer spending is off to a slow start this year, measures of consumer confidence continued to signal optimism. Consumer assessment of both current and future economic conditions remains high. The Conference Board's measure of confidence climbed to the highest level since December 2000. More important for real consumer spending, consumer's outlook for income growth and job growth both posted rather dramatic improvements over the past two months. In our view, this should translate into stronger real consumer spending growth beyond the first quarter.

While current quarter consumer spending will likely be soft, housing market data has begun to surprise to the upside. Pending home sales climbed 5.5 percent in February after falling 2.8 percent in January. In addition, new home construction bounced back in February more than offsetting January's decline. We now think that real residential investment will expand at a 10.5 percent pace in Q1, making residential investment in Q1 one of the few bright spots in our outlook for Q1 GDP growth.

U.S. Outlook

ISM Manufacturing • Monday

The ISM manufacturing composite continued to climb in February, jumping 1.7 points to 57.7 as manufacturers move on from the challenging period from 2015-2016. Most subcomponents rose in February, with strong jumps in new orders and production. The employment index slipped slightly but held in expansionary territory, which was verified by February's jobs report that showed a solid jump in manufacturing employment.

Hard data on factory orders and production have yet to match as survey measures, but final factory orders for February are also released next week, which may more closely follow the ISM. Moreover, there is underlying firming in the U.S. factory sector as commodity prices stabilize and global economic activity increases. We continue to keep our expectations in check for the factory sector, with solid steady gains in U.S. manufacturing.

Previous: 57.7 Wells Fargo: 57.1 Consensus: 57.1

Trade Balance • Tuesday

The U.S. trade deficit widened in January, to -$48.5 billion, as imports rose faster than exports. Imports of goods and services from other nations jumped $5.3 billion, while U.S. exports rose $1.1 billion. Some of January's import rise was in petroleum, but gains were also broad based among other categories, reflecting strong domestic demand. Real imports also rose more than real exports in the first month of 2017, which was an unfortunate start for Q1 GDP growth.

Preliminary data on goods trade released this week suggest that the goods-trade deficit narrowed in February. Advanced data show most of the drop was on the import side of the ledger, particularly of automotive and consumer goods. Automotive exports also slipped the preliminary February data, but by a lesser amount. We expect the final trade balance of goods and services to narrow in February to a deficit of -$44.5 billion.

Previous: -$48.5B Wells Fargo:-$44.5B Consensus: -$45.0B

Employment Report • Friday

The U.S. labor market remained robust in February, surprising markets by adding 235,000 jobs, bringing the three-month average gain to 209,000 jobs. Manufacturing and construction had strong months of hiring, as the factory sector rebuilds its workforce and mild winter weather pulled construction work forward in February. We may see some payback in construction job gains in March, but ISM employment indices continue to point to expanding manufacturing payrolls, though the pace may moderate. We expect the U.S. economy added 191,000 jobs in March, which is closer to its average over the past year and well above consensus.

The tight labor market may restrain hiring, with the unemployment rate currently at 4.7 percent in February. We expect the jobless rate was 4.7 percent in March.

Previous: 235K Wells Fargo:191K Consensus: 175K

Global Review

Mexico's Central Bank Raises Rates Again

• Economic activity in Mexico accelerated in January, up 2.96 percent year over year, besting market expectations of slower growth. Mexico's central bank increased its overnight bank rate to 6.50 percent at its most recent meeting.
• Inflation in Japan rose for the second consecutive month and retail sales are seeing meager gains as stagnant wage growth and higher energy prices weigh on personal consumption.
• As largely expected, Prime Minister May pulled the trigger on Article 50, starting the two-year legal process between the U.K. and the EU to sever its 44-year relationship.

Mexico's Central Bank Raises Rates Again

In Mexico, January's year-over-year change in economic activity index, which is highly correlated with overall GDP growth, bested market expectations by growing at a faster-than-expect 2.96 percent, up from 2.08 percent in December. Much of the gain was from a 12.8 percent jump in the agriculture sector and a 4.1 percent gain in the services sector, year over year. Both sectors have been showing improvement in recent months. On the other hand, Mexico's industrial sector is still showing some weakness on a year-ago basis, down 0.1 percent year over year, but this is likely due to the drag from utilities.

At its latest meeting, Mexico's central bank raised interest rates for the fifth time in a row, up 25 bps to 6.50 percent—pushing the overnight rate to a level not seen since early 2009. That said, we do not expect the central bank to keep raising rates at such an aggressive pace over the longer term. The recent peso rally has alleviated some of the inflationary pressures. Inflation increased to 4.9 percent year over year in February. Mexico's central bank, however, expects inflation to come back toward its 3 percent target by next year.

Japan's Inflation Rises, but Consumer Spending Shrinks

Meanwhile in Japan, consumer prices rose 0.3 percent in February, besting market expectations of a 0.2 percent increase. Japan's core inflation, which excludes fresh food prices, rose 0.2 percent. The increase in core inflation is good news for the Bank of Japan, which chose to keeps rates unchanged at its last meeting. However, higher energy prices have pushed up prices instead of solid economic growth. Excluding both food and energy prices, inflation is 0.1 percent lower than it was last year.

Retail sales rose 0.1 percent year over year in February, marking four sequential gains—welcomed news after eight months of declines. Despite the gains, sales in supermarket and department stores are down 2.7 percent from last year. Some of the weakness can be explained by fewer "selling" days this year as last year was a leap year, but stagnant wage growth, paired with higher price inflation is starting to erode consumer spending. This can be seen in the downshift in overall household spending in Japan, down 3.8 percent on a year-ago basis.

U.K. Signed the Divorce Papers

In a historic, yet highly anticipated moment, Prime Minister May triggered Article 50 of the Lisbon Treaty, formally declaring the U.K.'s intentions to withdraw from the EU. The signing begins the two-year legal process that will end with the U.K. leaving the EU. The Great Repeal Bill: White Paper, released by the U.K. government, laid out the country's proposals and converted some of the existing EU laws into domestic law. It is also worth noting that the U.K. is still a part of the EU and will continue to uphold the EU laws until exit, unless an extension is granted by the European Council. That said, we still look for the U.K. economy to remain stable, growing at 1.8 percent year over year in 2017 and in 2018. We also expect for the Bank of England to be cautious in the near term and leave rates unchanged for the rest of the year.

Global Outlook

Brazil Industrial Production • Tuesday

The Brazilian industrial production index emerged from negative territory in January on a year-over-year basis for the first time since February 2014. The turnaround in industrial activity is certainly a boon for the Brazilian economy, which has been in a recession since the beginning of 2015. GDP growth is expected to turn positive in Q1 of this year.

The mining sector, which has weighed heavily on industrial growth, grew 4 percent in Q4 2016. Manufacturing and utility production, however, contracted 2.4 percent and 7.5 percent in Q4 2017, which may restrict industrial activity from recovering fully in the near term. Industrial production is expected to have grown 0.4 percent in February. Also slated for release this week is Brazil's Manufacturing PMI, which has been in contractionary territory since February 2015.

Previous: 1.4% (Year-over-Year) Consensus: 0.1%

China Caixin Composite PMI • Wednesday

The Caixin composite PMI, which measures Chinese manufacturing and service firms linked to the rest of the global economy, increased to 52.6 in February from 52.2 in January. The index has been in expansionary territory since February 2016. Because China is the second-largest economy and the world's largest metals consumer and producer, this index is watched very closely.

China's Caixin manufacturing PMI will be released later in the day, with analysts expecting a 51.7 figure. The manufacturing PMI has been above the 50-threshold for eight consecutive months. Moreover, China's Caixin service PMI dropped to 52.6 in February from a 53.1 reading in January. Despite the month-over-month slowdown in the service component, the index remains comfortably in expansionary territory.

Previous: Manufacturing: 51.7; Services: 52.6 Consensus: Manufacturing: 51.7; Services: 51.7

U.K. Industrial Production • Friday

Industrial production (IP) in the United Kingdom decreased 0.4 percent in January compared to activity in December, but has grown 3.2 percent year over year. During January, mining activity grew 1.4 percent while manufacturing utilities expanded 1.5 percent. Dragging down the index was manufacturing activity, which contracted 0.9 percent. Despite the monthly slowdown, manufacturing has grown 2.7 percent year over year, perhaps supported by strong exports against the backdrop of a weak domestic currency. Markets expect IP activity to have increased 3.7 percent year over year in February.

Manufacturing production, also slated for release on Friday, is expected to have increased 0.2 percent on the month and to have grown 3.8 percent from a year ago.

Previous: 3.2% (Year-over-Year) Consensus: 3.7%

Point of View

Interest Rate Watch

Reaching the Fed's Inflation Target

While it was another week and another strong showing for "soft" data on the economy, the strength exhibited in the latest consumer confidence reading, including the improved views toward future income, has not translated into higher inflation expectations. Consumer inflation expectations, measured by the Conference Board and the University of Michigan Consumer Sentiment survey, fell in March and remain near at least six-year lows. The lack of reflation in consumers' inflation expectations remains consistent with the FOMC's go-slow approach to normalization outlined in the latest dot plot and echoed in comments this week.

Yet, inflation is rising. The Fed's preferred gauge, the PCE deflator, reached the FOMC's 2 percent target this week for the first time since 2012. The return to the Fed's target can be largely traced to the rebound in energy prices, but core inflation at 1.8 percent is also rising.

An alternative measure of core inflation, suggests that the underlying trend is even closer to the FOMC's target. The Dallas Fed's Trimmed Mean PCE deflator has again started to pull away from the traditional core index (middle graph). The trimmed mean PCE deflator is designed to track the trend in inflation better than the traditional core PCE, which simply excludes food and energy. The upward trend offers further evidence that inflation pressures are still rising, albeit gradually.

Most FOMC members, including Chair Yellen, remain firm believers in the link between wages and inflation. As indicated in the bottom chart, average hourly earnings have been trending higher over the past year and are expected to post a decent 0.3 percent monthly gain in March. While weak versus prior cycles (due in part to secular forces like weaker productivity and an aging workforce), the upward trajectory should be enough for the Fed to continue apace with tightening this year, even if consumers do not yet believe that stronger inflation is on the horizon.

Credit Market Insights

Assessing the Assets

Household asset appreciation remained firm to end 2016, increasing 2.1 percent for the second consecutive quarter. Real per capita household net worth is at an all-time high of $257,989, well above the prerecession peak of $234,050 in Q1 2007.

Household asset holdings in this cycle are more heavily tilted toward financial assets than tangible assets, such as real estate. This trend is more reminiscent of the late 1990's tech boom than the housing boom in the 2000s. Furthermore, asset appreciation has continued to start the year. The S&P 500 is up about 5 percent thus far in 2017, and home price appreciation has remained steady amid lean inventories. Thus, it seems likely that household net worth will continue to trek higher in Q1.

Fed officials have at times made note of rising asset prices and have raised concerns about highly accommodative monetary policy driving asset valuations. Prior to the Fed speak that significantly raised the probability of a March rate hike, there were questions about whether the "hard" economic data had improved enough to warrant back-to-back rate hikes. Perhaps the recent strength in asset prices played a role in the Fed's decision. Household assets relative to the size of the economy are historically high, with the peak of the housing bubble the only recent comparable period. If this trend continues and the Fed is indeed weighing asset valuations in its interest rate decision-making, further tightening would likely be on the horizon.

Topic of the Week

Taxing Questions: Corporate Tax Reform & Capex

Policymakers from both major political parties in the United States in recent years have advocated for a repatriation tax holiday, which would offer U.S. corporations the opportunity to bring those profits back to the United States at a rate substantially lower than the current corporate statutory tax rate of 35 percent. Among the oft-cited justifications for a tax holiday is that businesses suddenly flush with cash would boost corporate capital spending and hiring plans.

The prior repatriation tax holiday, the Homeland Investment Act of 2004, and the inflows that followed in 2005 showed that repatriations did not lead to an increase in domestic investment and job growth; if anything, outlays slowed and jobs were lost. Indeed, businesses rushed to take advantage of the temporary tax break, but, due to loopholes, funds were used to pay dividends or buy back stock from shareholders. The corporate sector was in good financial health then, and companies were not holding back on capital spending due to financial constraints that would be alleviated with the tax holiday. That said, does the current business environment suggest this time may be different?

The short answer is no. The corporate sector does not appear to be financially constrained at present and is not in need of another repatriation holiday. Profits as a share of GDP are higher than when the 2004 repatriation holiday was passed. Layoffs are at a fourdecade low, and job growth remains strong. While we expect corporate tax reform to include a permanent reduction in the tax rate for profits from overseas, the current environment and past experience suggest it will have only a negligible impact on capital spending. Instead, we expect other drivers of business spending, including rising profits, greater business optimism and stronger final sales, to boost equipment and intellectual property spending in the current year and on into 2018.

HIGHLIGHTS OF THE WEEK

United States

• Following the failure to repeal and replace the ACA, market participants questioned the new administration's ability to move forward with pro-growth policies. As such, major indicators opened lower on Monday, but risk sentiment recovered quickly as the week progressed.
• Positive developments included pending home sales data and an upward revision to fourth quarter GDP growth. Conversely, new data pointed to a deceleration for real consumer spending growth to below 1% (annualized) this quarter. That said, this appears to be only a temporary setback.
• Much of the recent sentiment uptick is related to the anticipated implementation of pro-growth policies. There are certainly risks on this front, suggesting that the Fed's 'wait and see' approach is the right one as far as baking in any potential impact on the economy.

Canada

• The Canadian economy started 2017 with a bang as GDP rose 0.6% month-over-month in January on broad-based strength.
• This sets the stage for another strong quarter of economic growth. TD Economics is currently tracking a 3.4% (q/q annualized) pace of economic expansion to start 2017, which would mark the best start to a year since 2013.
• Despite an improvement in the economic backdrop, recent Bank of Canada communication has remained dovish in tone. This seems to be due to the level of economic slack, which will take time to be absorbed, resulting in limited near-term inflationary pressure. We remain of the view that the Bank of Canada is unlikely to raise rates until late 2018.

UNITED STATES - MARKETS OVERLOOKING POLITICAL SETBACKS

The failure of the bill to repeal and replace the ACA last Friday set the tone for investors at the start of this week. Market participants questioned the new administration's ability to build consensus and move forward pro-growth policies, with major U.S. stock indices along with the greenback and long-term government rates opening lower on Monday. But, risk sentiment recovered as the week progressed, with most aforementioned indicators recovering beyond last Friday's levels (Chart 1). This was despite the triggering of Article 50 - the official initiation of the long divorce proceedings between the U.K. and E.U. - which has been largely anticipated. The recovery was partly related to the quick pivot by the U.S. administration to other agendas, such as tax reform, with emphasis on bringing forward the infrastructure plan and some executive actions. Moreover, the data-tone also helped ease some of the concerns.

The week was relatively light as far as first-tier economic data goes. But secondary indicators, such as pending home sales looked promising, surging in February and bringing the index level to a 10-month high. Unseasonably clement weather was part of the story, with some giveback likely in March. Nonetheless, this is a welcome development as it reinforces the notion that despite rising interest rates, housing continues to contribute to economic activity given solid labor market fundamentals.

Another positive development was the upward revision to fourth quarter GDP growth. The economy expanded by 2.1% (previously reported as 1.9%) due to more strength in consumer spending - upgraded by half-point to 3.5%. After that knock-out quarter, consumers tightened their purse strings at the start of this year. Data out this morning showed that real spending fell for a second consecutive month in February, with weather and delayed tax rebates likely playing a part. As such, real consumer spending looks set to advance by less than 1% in the first quarter of 2017. Still, this is likely to be only a temporary setback. Spending should bounce back in the second quarter, thanks to strong consumer confidence and accelerating income growth, restoring economic growth to a well-above trend rate.

While the economy remains on solid footing there has been an increasing divergence between survey and sentiment metrics (soft data) and harder indicators of economic activity (i.e. sales and incomes). This narrative can be illustrated by Bloomberg's surprise index where hard data has come in largely as expected while survey-based data has been the main thrust behind an improvement in the measure (Chart 2).

Ultimately, the strength of the economy will depend on which way the convergence will occur. Much of the sentiment uptick is related to the anticipated implementation of pro-growth policies. However, doubts as to the probability of success could quickly manifest into weaker readings. There are certainly risks on this front. For starters, tax reform is complex, and while lawmakers have some leeway, delays could put a dent in sentiment. Additionally, the failure to repeal and replace the ACA leaves the budget plan billions short, increasing the likelihood of scaled-down versions of other parts of the agenda. All told, it would appear the Fed's 'wait and see' approach is the right one as far as baking in any potential impact on the economy, with the anticipated three hike per year pace seemingly appropriate for the time being.

CANADA - GROWTH PICKING UP, POLOZ UNPERTURBED

What a difference a few months can make. There had been good reasons for cautious optimism in regards to the Canadian economy as we came into the tail end of 2016, but the economic performance in recent months has surpassed most expectations. This is best captured by the monthly GDP figures. The Canadian economy grew 0.6% month-onmonth in January, the best monthly performance in at least five years (excluding last June's post-wildfire pop-back). Moreover, it marked a third straight expansion, with healthy growth recorded in both November and December (Chart 1).

To be sure, a few months' worth of data does not a trend make. But, they can make a good starting point. Taking January's GDP data into account pushes our tracking for first quarter growth to 3.4%, which would mark the strongest start to a year since 2013. There is, as always, reason to be cautious - business investment remains well below pre-2015 peaks and the sustainability of real-estate led strength and its support to consumer spending remains open to debate. On balance however, the near term Canadian growth outlook is looking the best it has in years.

The improvement in the near-term outlook has not, however, resulted in the return of "Sunny Stephen" Poloz. Rather, the Bank of Canada governor used the question and answer session of a speech this week to reiterate a cautious outlook, which was further reinforced in a magazine interview published today. The governor pointed out that the past three years have seen several bouts of improving economic data, but none have yet proved persistent. When asked about the monetary policy tightening in the United States, he pointed once again to what he suggests is relatively more economic slack in Canada.

While its size vis-à-vis the U.S. can be debated, there does appear to be economic slack in Canada at present. Economists commonly refer to the 'output gap' to measure the slack in an economy by estimating how far behind (or ahead) the economy is relative to its potential path (or where it would be in the absence of shocks). A negative output gap tends to be associated with a lack of inflationary pressures. While the output gap is inherently unobservable, still-soft underlying inflation, as measured by the Bank of Canada's three core inflation measures, suggests that it remains below zero.

Indeed, The Bank of Canada's estimates point to sizeable slack remaining in Canada, reinforcing the governor's dovish tone (Chart 2). More importantly, the output gap does not appear likely to close any time soon. Taking the Bank of Canada's estimates of potential GDP and combining them with TD Economics' latest growth forecasts shows that the Canadian economy is unlikely to eat up its remaining economic slack this year. More likely is that the output gap closes some time in 2018. The bottom line is that, despite a brighter near term outlook, fundamental inflationary pressures are very soft at present, and so the continued dovish tone from the Bank of Canada should not be taken as a surprise. The most likely outcome remains a Bank of Canada that holds interest rates at 0.50% well into 2018.

US economic data and European risk to guide markets

The US dollar is mixed as it gained against the EUR, CHF, NZD and JPY but lost ground against the CAD, GBP and AUD. Political risk continues to impact markets as US uncertainty, the official triggering of Brexit and the upcoming French elections make investors anxious even as energy markets rebound thanks to a possible extension to the Organization of the Petroleum Exporting Countries (OPEC) production cut deal. On the diplomatic front Chinese President Xi Jinping will visit the US and is scheduled to meet US President Donald Trump for the first in-person meeting on April 6–7.

Following a week with scarce data, the first week of April will feature the Reserve Bank of Australia (RBA) rate decision on Tuesday, April 4 at 12:30 am EDT and the releases of the meeting minutes from the March meetings from the US Federal Reserve on Wednesday, April 5 at 2:00 pm EDT and the European Central Bank (ECB) on Thursday, April 6 at 7:30 am EDT. US data will grab the spotlight as manufacturing and non-manufacturing PMIs, crude inventories and jobs data are released.

US employment data will be released this week with the ADP private payrolls leading the charge on Wednesday, April 5 at 8:15 am EDT (12:15 pm GMT). After a strong reading last month of 298,000 forecasters are expecting the number of jobs to slow down, but to remain above 200,000. The US non farm payrolls (NFP) to be published on Friday, April 7 at 8:30 am (12:30 pm GMT) is expected add 180,000 jobs to the US economy keeping the unemployment rate at 4.7 percent with a slight rise in wages of 0.2 percent. The jobs component has been validating the decision of the Fed to move rates higher, but as inflation becomes central to the conversation the wage growth indicator will be key on Jobs Friday.

The EUR/USD lost 1.018 in the last five trading days. The single currency is trading at 1.0697 after the USD has recovered from political shocks as the Trump administration is reassessing its strategy to push pro-growth policies into other branches of the government. The partisan divide in the US will continue to restrain any forward momentum resulting from positive economic indicators. The EUR has gained from US uncertainty, but has lost ground as US fundamentals remain strong and Fed speakers continue to fan the flames of further rate hikes in 2017.

Germany continues to be the engine of the EU and strong retail sales (1.8 percent) beat the estimate but inflation in the Union was lower than the estimate at 1.5 percent which puts less pressure on the European Central Bank (ECB) as it has put itself in a position where it might still have a QE program while needing to hike rates if inflation keeps climbing rapidly.

Next week will be more US focused as employment indicators will be releases as well as the meeting notes from the March Federal Open Market Committee (FOMC) which resulted in a 25 basis points interest rate hike. The US non farm payrolls (NFP) report is the biggest economic release and could end up helping the dollar get out of the current funk due to political stagnation.

The GBP/USD gained 0.349 percent in the last week. The pound is trading at 1.2535 higher than the lows of the week at 1.2377 which is a good sign considering Article 50 kickstarted the Brexit process on Wednesday. The estimated two year length of the process and the fact that it is the response and negotiations with Europe that will drive markets have kept the GBP at current levels. The currency will remain tied to political events as there is still a gap between what the UK think it can negotiate and what Europe considers fair for a nation leaving its Union.

The European parliament will make an official statement regarding Brexit on April 4 with a deadline later in the month to prepare a joint document on the Union's points to negotiate. Final approval of the document is on April 29 when the European Commission will outline the rules for the negotiation. Given that the currency market has already priced in the initial Brexit move last year the spotlight now moves on the negotiation and on the potential impact of the French elections on the EUR. Given the rise of Marine Le Pen and her National Front even though a Frexit looks like an unlikely outcome worse was said about Brexit.

Oil rose 5.582 percent in the last five days. West Texas is trading at $49.95 and has broken above the $50 price level awaiting more details on a possible extension of the Organization of the Petroleum Exporting Countries (OPEC) production cut agreement. The original deal was only for six months, but given a combination of the effects of the agreement and the oversupply in the market the price of energy has bounced from the lowest levels since producers started reducing their output in January. The price is still far from 2017 highs of 54.53 but the threat of US shale producers and others who are not part of the OPEC and non-OPEC agreement continues as they are ramping up production and reactivating drilling sites. The OPEC will meet in May 25 with the deal extension sure to be on the agenda.

Market events to watch this week:

Sunday, April 2

• 9:30pm AUD Retail Sales m/m
• 9:45pm CNY Caixin Manufacturing PMI

Monday, April 3

• 4:30am GBP Manufacturing PMI
• 10:00am USD ISM Manufacturing PMI
• 9:30pm AUD Trade Balance

Tuesday, April 4

• 12:30am AUD Cash Rate
• 12:30am AUD RBA Rate Statement
• 4:30am GBP Construction PMI
• 5:15am AUD RBA Gov Lowe Speaks
• 8:30am CAD Trade Balance
• Tentative NZD GDT Price Index

Wednesday, April 5

• 4:30am GBP Services PMI
• 8:15am USD ADP Non-Farm Employment Change
• 10:00am USD ISM Non-Manufacturing PMI
• 10:30am USD Crude Oil Inventories
• 2:00pm USD FOMC Meeting Minutes

Thursday, April 6

• 7:30 am EUR ECB Meeting Minutes
• 8:30am USD Unemployment Claims

Friday, April 7

• 4:30am GBP Manufacturing Production m/m
• 8:30am CAD Employment Change
• 8:30am USD Average Hourly Earnings m/m
• 8:30am USD Non-Farm Employment Change

*All times EDT

S&P 500 (cash) near term outlook:

Big picture view from early March of at least a few weeks of correcting from the Mar 1st high at 2401 (wave iv in the rally from the Jan 23rd low at 2257) and with eventual new highs after (within wave v) remains in place. In the Mar 24th email warned of potential, near term volatility on the US health care vote. The market did indeed pop lower, reaching that long mentioned bullish trendline from Dec (then at 2322) and before rapidly reversing higher. Though further gains above that 2401 high are still favored, that bearish trendline from Mar 1st (currently at 2378/01) may provide a few days/week of consolidating first (see in red on daily chart below). Nearby support is seen at 2348/51 and that bullish trendline from Dec (currently at 2327/30). A final note, though gains above 2401 are still favored, the magnitude may be more limited (and versus the start of a more major, new upleg). The market no doubt remains overbought in the bigger picture, lots of longer term resistance lies just above (see longer term below) and that series of 5 months spikes higher in the vix occurs again over the next few weeks (see 2nd chart below). Bottom line : gains above that 2401 high still favored but the big picture magnitude of further upside is a question.

Strategy/position:

Reached the buy target from the Mar 24th email at 2325 on Mar 27th (3 pts above the bull trendline from Dec) and for now, would stop on a close 3 pts below. However, with gains above that 2401 high potentially limited, will want to get much more aggressive in such upside (to reflect that risk).

Long term outlook:

Long held view an extended period of broad ranging higher (at least another few months) but with the pullbacks becoming more significant as the long term upside momentum slows, remains in place. Note as discussed above, the upside pattern from Jan as well as Nov and even last July (currently within wave 3) are still not "complete" and in turn argues a further period of "net" upside as these patterns unfold. But with the market very overbought after the last few years of sharp gains and nearing lots of longer term resistance, use the term "net" as the bigger picture upside is likely to become more "difficult"/limited and thus the expected period of a broad, ranging higher (with increasing pullbacks). Lots of long term resistance is above that Mar 1st high at 2401 at the rising trendline from Apr 2016 (currently at 2323/28) and the very long term ceiling of the bull channel from 2009 (currently at 2455/70, see weekly chart/2nd chart below) and adds to the nearer term view that bigger picture gains above 2401 may be limited. HoweverBottom line : still favor at least another few months of "net" upside, but with the pullbacks along the way potentially becoming more significant as the long term upside momentum starts to slow.

Long term strategy/position:

With further upside likely to become more rangy (as the longer term upside momentum slows), will generally stay with that approach of waiting for bigger picture pullbacks to buy and then being aggressive with stops on gains.

Current:

Nearer term : long Mar 27th at 2325 for gains above 2401.

Last : long Mar 10th at 2369, stopped Mar 21 below t-line from Nov (2370, closed at 2344).

Longer term: min few more months of upside, likely to range higher (good pullbacks along the way).

Last : same as shorter term above.

USDCHF: The pair looks to extend its upside pressure after closing strongly higher the past week. On the downside, support lies at the 0.9950 level. A turn below here will open the door for more weakness towards the 0.9900 level and then the 0.9850 level. On the upside, resistance resides at the 1.0100 level where a break will clear the way for more strength to occur towards the 1.0150 level. Further out, resistance comes in at the 1.0200 level. Its daily RSI is bullish and pointing higher suggesting further strength. All in all, USDCHF faces further price strength.

In this technical blog, lets take a quick look at the 1 hour Copper Elliott wave view from March 09 lows. In which the the metal was showing 5 waves bounce from March 09 (2.5593) low & the bounce was impulsive rather then corrective sequence. Thus suggesting the cycle from (2.5593) low could be following the Elliott wave Zig-zag pattern. Where the cycle from (2.5593) low ended at March 20 peak (2.6979) that we have labelled as Minute wave ((a)) of the zig-zag pattern. According to Elliott wave theory Zigzag is a 3 wave structure having internal subdivision of (5-3-5) swing sequence. The internal oscillations are labeled as A, B, C where A = 5 waves, B = 3 waves and C = 5 waves. This means that A and C can be impulsive or diagonal waves. However the A and C waves must meet all the conditions of wave structure 5, such as: having an RSI divergence between wave subdivisions, ideal Fibonacci extensions, ideal retracements etc. The cycle from (2.5593) low to (2.6979) was in 5 waves sequence, then the 3 wave dip in Minute wave ((b)) was expected to hold above (2.5593) low for next leg higher in Minute ((c)) leg higher into the direction of previous wave ((a)) or for 3 swings bounce at least.

Copper 1 hour chart

Below is the 1 hour March 27 NY updated chart showing the pullback happening in the metal within Minute wave ((b)), as Elliott wave double three structure from (2.6979) peak, where first leg lower ended in Minutte wave (w) at (2.5863) & Minutte wave (x) at (2.6544), then based on the correlations with US dollar & other commodities i.e OIL, Natural GAS & Metals, Copper was expected to stay above (2.5593) invalidation level.

Copper 1 hour March 27 NY updated chart

Since then Metal pulled back as expected, the pull back went quite deep but it was still holding above the Invalidation level (2.558) and as far as price stays above there, we were expecting Minute wave (( b )) to complete and metal to turn higher, as shown below

Copper 1 hour March 28 Asia updated chart

FX Markets - False Positive In European Inflation

European investors have been cautiously watching last week's EU inflation data for likely forces driving the ECB's monetary policy strategy. Since February, consumer price inflation accelerated to its fastest pace since January 2013 and markets have been debating the rationale and sustainability of the ECB ultra-loose monetary stimulus policy. In addition, headline inflation which is trending higher towards the central bank's objective of below but close to 2%, with divergent core inflation, exuding persistent weakness, is a concern for Draghi.

The data release is expected to temporarily suspend demand for exiting accommodating positioning. Eurozone flash HICP inflation dropped 0.5% to 1.5% in March below consensus of 1.8% while core inflation slid to 0.7% y/y from 0.9% in February, below expectations for 0.8% print. HICP components indicate that all three indexes contributed to the fall in headline inflation.

With the "courgette shortage" fading, fresh food prices have moderated, sending food, alcohol, and tobacco price inflations to 1.8% from 2.5%. In addition, with crude prices falling energy price inflation also weakened to 7.3% from 9.3%. Overall seemingly headline inflation peak of 2.0% in February seems like an anomaly and unlikely to concern the ECB. However, with solid economic data including stronger labour-market outlook we suspect that underlying inflationary trend is on track and March data is a temporary. We could see core inflation climb to 1.1% by June supported by Easter related price increases. Less important are expectations that headline inflation will rebound to 1.8% by June.

The ECB spent much of last week trying to control market chatter over the exit. ECB members have been increasingly concern that the market is getting ahead of itself by misreading communications.

Dovish comments from ECB members such as Nowotny have done little to shift our European outlook. Yet, between data and comments our suspicion remains, that calls for the end of extreme policy setting (negative rates, easy lending, and bond purchases) are getting heard. ECB board member Coeure stated that it was "legitimate" for the ECB to review its pledge to keep rate at record low levels.

Overall, we don't expect to see actual changes in asset purchases and negative interest rates until 2018. However, in between the dovish guidance we suspect there will be hints of tightening. We suspect that we will get higher deposit rate before QE ends in a strategy to keep the market off guard. We remain constructive on EURUSD barring any shift in the French election outlook.

Economics - Brazilian Government Caps Spending

In spite of rising global uncertainty, emerging market currencies have been rather resilient over the last couple of weeks. However, one has to acknowledge that volatility also increased temporarily as investors preferred to remain cautious in the event that Donal Trump had to face another setback in implementing his programme. After completely erasing losses from last November and returning to around 3.05 in February, the Brazilian real has been trading in a volatile range since then, moving between 3.06 and 3.20 as investors await further clarity on the US outlook to emerge.

It goes without saying that local developments in EM countries have been largely ignored recently - with the exception of the political turmoil in South Africa last week - as market participants were too busy trying to anticipate Trump's next move. In Brazil, the economy is slowly gearing up as the central bank progressively eases its monetary policy. The Selic rate is currently at 12.25% but the market anticipates the benchmark rate to reach 9% by the end of the year as inflation is expected to return within the BCB's target range of 4.5% +/-1.5%.

All in all, looking at the hard data it seems as though Brazil is on the right track, however on the domestic side, the political situation is in complete upheaval and the uncertainty that stems from it should prevent the real from returning quickly towards its pre-recession levels. Moreover, the austerity measures planned by the government will further delay a speedy recovery as the lower classes of the Brazilian society are losing purchasing power. On the other hand, it will restore confidence and attract foreign investments. In the short-term BRL gains cannot be ruled out as investors are still chasing returns and Brazil's temporary stability is quite attractive. Nevertheless, the market is in wait-and-see mode and has slightly shifted to risk-off.

Economics - UK: The Exit Process Has Finally Begun

Nine months after the Brexit vote, Theresa May has finally started the exit process by triggering Article 50 of the Lisbon Treaty. The UK Prime Minister has spoken in front of the House of Commons last Wednesday. A letter has then be delivered by 1.30pm to Donald Tusk. Negotiations should last at least two years but the UK will still benefit many bilateral agreements in the meanwhile.

The pound fell the day before from 1.2460 to 1.2380 against the dollar. In our view, we believe that the markets are still overly pessimistic about the UK situation. Recent economic data is improving, but we also believe that the pound should appreciate in the medium-term. It is clear that economists widely missed the target with their doomsday prophecies and ironically, it is this very market pessimism that is supporting the UK economy by increasing the competitiveness of its exports.

Now that Brexit is officially a done deal, the next questions will revolve around the nature and tone of negotiations. 27 counterparts must accept and agree with the UK's terms with each country holding a veto over these conditions. It is for this reason that it is so difficult for countries to renegotiate treaties in general. For this reason, we find the promise to renegotiate treaties somewhat scammy.

Last week, in the two days following the triggering of Article 50, the Footsie 100 has risen and is now trading 16% higher than pre-Brexit levels. It makes the increase even more impressive since the 2016 Brexit vote also sparked a sell-off

Now our view for the negotiations is that we believe there won't be any hard Brexit. It is nonetheless clear that negotiations will be tough with all members having to agree on the final deal, which means that the next two years will be a serious rollercoaster ride.

We are also bullish on the pound which we should further appreciate this year. Strengthening of the pound is now very likely especially as Europe faces a veritable minefield with the upcoming French and German elections. Time to reload GBP.

Themes Trading - Swiss Small Gems

Switzerland's stability has provided ideal soil for global brands to develop. The Swiss National Bank's commitment to hold interest rates negative "for some time" should convince domestic savers to move their savings into stocks while allowing the Swiss franc to further devalue. With a weaker Swiss franc, companies will regain some of the competitive edge they have lost. However, Swiss companies rely more on brand quality and innovation than on pure price competitiveness. Outside the blue chip names are small cap companies that are perfect for value investors, offering a P/E of 15x (compared with 18x for US small caps) and attractive dividend yields.

This theme was built using companies with market capitalizations below CHF 2 billion, P/E less than 18 and used a standard GARP (growth-at-areasonable price) model to uncover the most attractive stocks.

Swiss Small Gems theme can now be trading in an easy to execute Strategic Certificate.

USD/CHF - 1.0006

Most recent candlesticks pattern : N/A

Trend                                    : Near term up

Tenkan-Sen level                  : 1.0010

Kijun-Sen level                    : 0.9991

Ichimoku cloud top                 : 0.9963

Ichimoku cloud bottom              : 0.9907

Original strategy :

Buy at 0.9950, Target: 1.0050, Stop: 0.9915

Position : -

Target :  -

Stop : -

New strategy  :

Buy at 0.9950, Target: 1.0050, Stop: 0.9915

Position : -

Target :  -

Stop : -

As the greenback has eased after rising to 1.0025 in NY morning, suggesting minor consolidation below this level would be seen and pullback to 0.9980 cannot be ruled to, however, reckon 0.9948-51 (previous support and 38.2% Fibonacci retracement of 0.9831-1.0025) would limit downside and bring another rise later, above said resistance at 1.0025 would extend the rise from 0.9813 towards previous support at 1.0060 (now resistance) but loss of upward momentum should prevent sharp move beyond resistance at 1.0109. 

In view of this, would not chase this rise here and would be prudent to buy dollar on pullback as said support at 0.9948 should limit downside. Below 0.9925-30 (50% Fibonacci retracement of 0.9831-1.0025) would abort and signal top is formed instead, bring correction to 0.9905 (61.8% Fibonacci retracement) but reckon previous resistance at 0.9869 would hold from here. 

GBP/USD - 1.2511

Most recent candlesticks pattern   : N/A

Trend                                 : Near term up

Tenkan-Sen level                 : 1.2476

Kijun-Sen level                    : 1.2476

Ichimoku cloud top              : 1.2476

Ichimoku cloud bottom        : 1.2462

New strategy  :

Stand aside

Position : -

Target :  -

Stop : -

As cable has rebounded again after finding support at 1.2433, retaining our view that further consolidation above this week’s low at 1.2377 would be seen and another bounce to 1.2524 and possibly 1.2550 cannot be ruled out, however, as broad outlook remains consolidative, reckon upside would be limited to 1.2575-80 and price should falter below 1.2600, bring retreat later.

On the downside, whilst pullback to the Kijun-Sen (now at 1.2478) cannot be rued out, reckon downside would be limited to 1.2450 and said support at 1.2433 should hold. Only break of 1.2433 support would revive bearishness and suggest the rebound from 1.2377 has ended, bring weakness to 1.2400, break there would confirm and retest of 1.2377 would follow.

EUR/USD - 1.0690

Most recent candlesticks pattern   : N/A

Trend                      : Near term down

Tenkan-Sen level              : 1.0686

Kijun-Sen level                  : 1.0705

Ichimoku cloud top             : 1.0796

Ichimoku cloud bottom      : 1.0745

Original strategy  :

Sell at 1.0745, Target: 1.0645, Stop: 1.0780

Position : -

Target :  -

Stop : -

New strategy  :

Sell at 1.0765, Target: 1.0645, Stop: 1.0800

Position : -

Target :  -

Stop : -

As this week’s selloff has kept euro under pressure, adding credence to our bearish view that top has been formed at 1.0906 and bearishness remains for the decline from there to extend further weakness to 1.0660, then 1.0640, however, near term oversold condition would limit downside and reckon previous strong support at 1.0600 would hold from here, bring rebound later.

In view of this, would not chase this fall here and would be prudent to sell dollar on recovery as 1.0765-70 should limit upside. Only a firm break above resistance at 1.0773 would suggest low is formed instead, bring a stronger rebound to 1.0800 but resistance at 1.0827 should remain intact.