The U.S. Federal Reserve gives every indication of being bullish U.S. and global growth for an array of reasons we have written about in previous articles. Orchestrated stimulative global growth was achieved for the most part in 2017, and from all indications will continue through 2018 and possibly well into 2019.
This is allowing: Interest rates to rise both domestically and globally; the dollar to have more weakness than strength against most currencies; most global equity markets to show more strength than weakness; and for an increasing demand for commodities of all types. Given fundamentals have weighed heavy on rice, grain, and several soft commodities to date.
The next U.S. Federal Reserve-Federal Open Market Committee (FOMC) meeting is March 20 and 21, 2018.
The markets have already factored in a Fed Funds Rate increase from 1.50 to 1.75. A month ago the Fed Fund Rate was 1.50 and a year ago the rate was .75.
The new Fed Chairman, Jerome Powell, will hold his first press conference after a FOMC meeting Wednesday, March 21, 2018, so how could he surprise market participants?
The Fed Chairman could provide verbal guidance that is more optimistic about growth, implying inflationary forces are building; he could imply the possibility of three or more additional rate increases in 2018 or four total rate increases in 2018; he could indicate an acceleration in balance sheet reduction, just to mention a few ways he could move the market.
Market participants currently expect a March 21, 2018, rate hike and two additional .25 percent rate hikes in 2018, but what is the probability of a fourth rate hike in 2018?
What could lead to a fourth rate hike in 2018? There are a number of possibilities: One possibility would be U.S. and global stimulus driven growth exceeds expectations thereby opening the door for a fourth rate hike in 2018; another possibility would be the fear of global recessionary forces emerging in the second half of 2019, which could force an accelerated global injection of stimulative policy activities to allow additional rate increases to achieve a 3-plus percent Fed Fund Rate increase before the next U.S. recession and global economic downturn.
Public confidence is the name of the game, so at this week’s FOMC press conference the Fed Chairman is expected to be highly upbeat and optimistic about the U.S. economy and imply the same for global economic growth prospects, and suggest the likelihood of an additional .25 percent rate hike in June.
Looking at the week ahead
U.S. Dollar Index: The trend in the U.S. Dollar Index remains down. Since February 1, 2018, the dollar has been correcting its downside move and consolidating by moving sideways before continuing its likely slow journey sideways-to-down, possibly to 78.
10-Year US Treasury Yield: An interesting week lies ahead as the NASDAQ Composite has returned to all-time highs, an almost certain Fed Funds Rate increase from 1.50 to 1.75 and a continued unwinding of the Fed’s balance sheet. The most likely market reaction to coming policy events is a continued consolidation and/or corrective period in an array of global equity and commodity markets before advancing higher. Therefore, the 10-year yield likely continues moving sideways as markets realign for another one month or more.
S&P 500: The trend in this market remains up. This is a market that arguably needs further correction and/or an extended period of consolidation, so exercise caution. Simply watch the price action for guidance.
NASDAQ Composite Index: This market remains bullish, but more corrective activity would be desirable. Just let price action provide guidance.
CRB Index: As long as Light Crude Oil remains above $60 per barrel, this commodity index is reflecting the dynamics of stimulus driven global growth. I remain bullish global growth, therefore, I am bullish demand for commodities globally and oil specifically as the year progresses. Near term, anticipate additional consolidation likely to occur.
$WTIC Light Crude Oil: This market is defining a new trading range with a near-term price floor of $60. An interesting array of factors from fundamentals, to global policy drivers, to social, economic, political, and military uncertainties keep this market at elevated levels, and they do not appear to be losing their influence anytime soon.
Soybeans: Current price action appears to be corrective. Price action is presently all important as markets digest potential 2018 soybean acreage and production. Global equities will likely be less than supportive of the commodity sector in general this week and maybe for multiple weeks. Soybean fundamentals and trade uncertainties will continue to be less than supportive of soybean prices.
Corn: Corrective price action underway before moving higher, but an acceleration in soybean price weakness could be problematic.
Wheat: Prices need to hold current levels or consideration to a more accelerated price decline needs serious consideration.
Long Grain Rice: At these price levels, old crop long grain rice needs a new demand source for additional sustained price strength, and September futures likely have more weakness than strength as market participants digest the potential of a significant expansion of 2018 U.S. long grain rice planted acres.
Cotton: Cotton prices still appear to be in a slow grind to the upside. Closing and holding above 88 cents this week would be very bullish.
Bankrate.com on the Fed Funds Rate:
What it means: The interest rate at which banks and other depository institutions lend money to each other, usually on an overnight basis. The law requires banks to keep a certain percentage of their customer's money on reserve, where the banks earn no interest on it. Consequently, banks try to stay as close to the reserve limit as possible without going under it, lending money back and forth to maintain the proper level.
How it's used: Like the federal discount rate, the federal funds rate is used to control the supply of available funds and hence, inflation and other interest rates. Raising the rate makes it more expensive to borrow. That lowers the supply of available money, which increases the short-term interest rates and helps keep inflation in check. Lowering the rate has the opposite effect, bringing short-term interest rates down.
Bobby Coats is a professor in the Department of Agricultural Economics and Agribusiness, University of Arkansas System, Division of Agriculture, Cooperative Extension Service. E-mail: [email protected].
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