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Falling interest rates, U.S. equity firmness, commodity index weakness in headlinesFalling interest rates, U.S. equity firmness, commodity index weakness in headlines
Commodity Index has become dangerously weak, and growers should not rule out an additional leg down given sluggish global growth and other factors.
5 Min Read
Bobby Coats and Bert Greenwalt, agricultural economists with the University of Arkansas and Arkansas State University, catch up at the Agricultural Council of Arkansas annual meeting in Little Rock.
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What to expect from the markets this week, June 5, 2017
Market “Near Term” Snap Shot
10-year Treasury Yield: Remains bullish – lower interest rate with more weakness than strength
S&P 500: Caution – Global investment demand remains supportive of prices, technology component of index presently supporting price strength, longer term trend remains up
Global Equities: Some consolidating gains; others near term bullish; any significant corrective activity in the S&P 500 will spill-over into many global equity markets (see slide show for individual countries)
U.S. Dollar: Remains Bearish - More weakness than strength; normally a positive for commodities, but presently not so much with supply mostly outpacing demand and renewed concerns of global economic uncertainties
Oil $WTIC: More weakness than strength; expect price volatility due to fundamentals, soft inflationary pressures, and uncertain fiscal, monetary, trade and regulatory policy weighing heavy on this market
Commodity Index: Dangerously weak, do not rule out an additional leg down given sluggish global growth, geopolitical challenges, overall commodity supply exceeding demand
Corn and Wheat: Basing Continues – Commodity sector weakness near term problematic
Soybeans: Soybeans are in search of a bottom at $9.06 or possibly the $8.35 area
Rice: Slight bullish bias remains due to U.S. long grain 2017 acreage and production uncertainty, but slowly losing momentum
Cotton: With the 84-cent-plus price objective achieved now we wait on price action to determine if additional price strength exists.
Inflationary Forces Waning
Stimulative reflation and rising interest rates retreat causing investors to seek safe-haven investment opportunities. Turning bonds bullish and supporting many U.S. and global equity markets, see accompanying slide show. The commodity sector for the most part weakened this past week, as domestic and global economic weakness concerns continued to rise.
On May 30, 2017 Federal Reserve Board Governor Lael Brainard raised concerns about “lagging growth and weakening inflation numbers” in a speech Navigating the Different Signals from Inflation and Unemployment, at the New York Association for Business Economics, New York, New York.
Lael Brainard closed her speech by saying, “I will be watching carefully for any signs that progress toward our inflation objective is slowing. With a low neutral real rate, achieving our symmetric inflation target is more important than ever in order to preserve some room for conventional policy to buffer adverse developments in the economy. If the soft inflation data persist, that would be concerning and, ultimately, could lead me to reassess the appropriate path of policy.” Speech Link: https://www.federalreserve.gov/newsevents/speech/brainard20170530a.htm
Bloomberg: Fed's Brainard Says Soft Inflation May Warrant Rate Rethink, by Jeanna Smialek and Matthew Boesler, May 30, 2017
“Federal Reserve Governor Lael Brainard said soft inflation could cause her to reassess the path forward for monetary policy should it linger, even as the global economic outlook brightens and U.S. growth looks poised to rebound.
“If the soft inflation data persist, that would be concerning and, ultimately, could lead me to reassess the appropriate path of policy,” Brainard said in prepared remarks Tuesday. She said her baseline expectation is that “it likely will be appropriate soon to adjust the federal funds rate” and start shrinking the balance sheet.
Brainard’s remarks underline a puzzle facing the U.S. central bank. Joblessness has fallen to a post-crisis low and consumer confidence is strong, yet price pressures have cooled, which could make the Fed’s coming discussions more complicated. Policy makers lifted rates in March and have penciled in two more 2017 rate increases, and investors expect the first of those to come in June.”
In addition to the following “Expanded near Term Market Considerations Week Beginning June 5, 2017”
Download Slide Show for charts and expanded details at the download link.
This Week’s Select Summary Considerations:
10-Year US Treasury Yield:
We enter the week bullish with a potentially lower yield
Economic Weakness, Event Risk Concerns, or Other Market Concerns/Factors will likely take yields lower to 2 or below before moving higher
As global events unfold (economic, social, political, etc.) chart activity will provide guidance
US Dollar Index:
Remains Bearish: For a period the dollar should have more weakness than strength especially against the Euro
Big Picture: The dollar has a bullish bias given global economic, social, political and military challenges
Unless Middle East, North Korean, European, other anomaly events start to dominate market participant decisions for a period, then we are still DEFINING a trading range 95 -104
CRB Index:
Global economic uncertainties have this index dangerous weak, an additional leg down should be expected before bottom is in place
Between Fed off-again and on-again accommodation and/or verbal guidance, building uncertainties surrounding fiscal, trade and regulatory policy simulative activities, the $CRB Commodity Index a key economic indicator has struggled
Bigger Picture: Though spastic global macro forces in general remain supportive of the commodity sector
$WTIC Light Crude Oil:
Near-term prices remain in 45 to 55 dollar trading range
Additional price weakness will likely be problematic for the $CRB Index and commodity sector
Sustained oil prices below $50 presents macro challenges and raises global economic momentum concerns
2017 – Likely primary range $40 to $60 with possible high in $72 area
Soybeans:
In search of a bottom at $9.06 or possibly $8.35
A resumption of commodity index weakness, a likely function of fundamentals and Fiscal and Monetary Policy and Global Economic Uncertainties, could translate into a final price low at $8.35 or lower
Simply stated watch the price action to define soybean price dynamics
Corn:
Basing period underway followed by upward price momentum
Cautionary Note: A resumption of oil price weakness could possibly be problematic for corn prices
Long Grain Rice:
Slight bullish bias remains due to U.S. long grain 2017 acreage and production uncertainty, but slowly losing momentum
This is a highly complex market with an array of factors impacting price from 2016/2017 fundamentals; 2017 acreage, production and quality uncertainties; present underlying aggregate commodity sector dynamics; problematic global economic momentum, geopolitical uncertainties, and/or global agronomic outlook
Cotton:
With the 84-cent price objective achieved now we wait on price action to determine if additional price strength exists
Wheat:
Global economic uncertainties weigh heavy on this market, but price potential to $4.71 to $5.51 remains a possibility
SPY SPDR S&P 500 ETF:
Cautionary period
Allow price action to unfold
Larger trend remains up
QQQ NASDAQ Power Shares:
Momentum driven by a select few technology stocks
Allow price action to unfold
Larger trend remains up
EFA iShares ETF - Global Equities Excluding U.S. and Canada:
Trend remains up
EEM iShares ETF, Emerging Market Equities:
Entering a cautionary period
Trend remains up
Bobby Coats is a professor in the Department of Agricultural Economics and Agribusiness, Division of Agriculture, University of Arkansas System. E-mail: [email protected].
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