james hardie industries may benefit from upcoming u s fed monetary policy 2685492017

On 01 February 2017, U.S. Federal Reserve (Fed) will announce its first monetary policy decision for 2017 after it hiked its benchmark policy Fed fund rate to 0.75% by 25bps in the last meeting on December 2016.

In the upcoming meeting, the 30-day Fed Fund futures market as at 25 January 2017 has priced a zero chance of a rate hike. In the medium-term horizon, we believe that the Fed is likely to maintain its normalisation monetary policy stance and to hike at least three times in 2017 based on its latest “dot plot” projections released in the previous December 2016 meeting.  The most important focus will be the “choice of words” in the upcoming monetary policy statement as there will be no press conference on 01 February 2017. Recent economic data has suggested that business conditions have started to improve; Industrial Production for December 2016 has increased to 0.5% y/y after it registered negative y/y growth in the last 11 consecutive months since Jan 2016, Flash Markit Manufacturing and Services PMIs for January 2017 have beaten expectations (both came in at 55.1) and they have been rising steadily above the 50 level (an indication of expansion) since August 2016.

Therefore, any change of tonality on business fixed investment from “remained soft” as per mentioned in the last press statement in December 2016 to a more upbeat assessment of it will solidify the pace of expected future interest rate hikes later in 2017. This is likely to put upward pressure on the U.S. Treasury 10-year yield after it has managed to stage rebound right above the 2.285% intermediate support which will eventually support further USD strength. Interestingly, the USD Index futures has managed to stage a rebound after a test on its significant intermediate pull-back support of 100.26 (former multi-month range resistance from March 2015) on Thursday, 26 January 2017.

Thus, a firm Fed that follows through its intended path of interest rate hikes or may even quickens its pace after more clarity from U.S. President Trump’s fiscal policies is likely to be positive for firms that have revenues inflows denominated in USD. One of them is James Hardie Industries (ASX: JHX).

Key fundamental factors

• James Hardie Industries, a manufacturer of fibre cement products and systems for building applications has a high percentage of its total net revenue derived from the North American and Europe markets (close to 80%). In its last Q2 Fiscal Year 2017 earnings announcement, the North America Fibre Cement Segment’s net sales recorded an increase of 10% for the quarter and 12% for half-year ended on 30 September 2016. These figures represent steady growth in the North America market and a rising USD will reinforce total net earnings further upon conversion.
• U.S President Trump’s fiscal policies on infrastructure spending. On 24 January 2017, President Trump has signed an executive order on “expediting approvals for high priority infrastructure projects”. This order has reinforced Trump administration push for big spending on infrastructure that can kick start a wave of rapid construction across U.S. in the very near future. James Hardie that already has a strong presence/foothold in U.S. is likely to be a beneficiary in this initiative that can translate into higher revenue growth.

Technical charts of James Hardie Industries (ASX: JHX)

(Click to enlarge charts)

Key technical elements

• Since the major March 2009 low of 2.89, James Hardie has been involving in a long-term bullish ascending channel with its corresponding channel support now at 18.33 which also confluences with the 23.6% Fibonacci retracement of the on-going long-term uptrend from the March 2009 low of 2.89. In addition, the weekly RSI remains positive above its significant trendline support and still has room to manoeuvre to the upside before reaching an extreme overbought level. These observations suggests that the upside momentum of price action remains intact (see weekly chart).
• The upper limit of the aforementioned long-term ascending channel stands at 28.40/29.60 stands at 28.40/29.60 which also confluences with a Fibonacci projection cluster (see weekly chart).
• Intermediate resistance stands at 26.65 which is defined by the one-time Fibonacci projection of the recent multi-month up move from 18 January 2016 low to 26 July 2016 high of 22.57 projected from the post U.S. President Election (09 November 2016) low of 17.80 (see daily chart).

Key levels (1 to 3 months)

Intermediate support: 19.60

Pivot (key support): 18.33

Resistances: 22.77, 26.65 & 28.40/29.60

Next support: 14.15

Conclusion

As long as the 18.33 pivotal support holds, James Hardie is likely to see a further potential up move to retest the intermediate current all-time high area of 22.77 before targeting the next resistance at 26.65 and even the major risk zone of 28.40/29.60.

However, failure to hold above 18.33 may invalidate the bullish scenario to trigger the start of a correction towards the next support at 14.15 in the first step.

Charts are from eSignal

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