As a pilot flies on the next leg of his journey, market participants are finding the next leg of their journey possibly a multi-month consolidation period with brief moments of white-knuckle turbulence encountered along the way.
Recent White-Knuckle Turbulence
First, the recent Houthi drone attacks on the world’s largest oil refinery and other oil assets inside Saudi Arabia spiked oil prices and Second, last week’s repo melt-up in interest rates, caused emergency intervention by the Federal Reserve to stabilize and liquify lending activities with billions of dollars. We will discuss the looming future dangers of the repo market in a future article.
Favorable weather to-date appears to be providing a tail-wind for the remainder of the 2019 row crop production season, which likely adds to the bearish fundamentals for soybean, corn, wheat, and cotton prices. Rice fundamentals are presently bullish for rice prices, so at this time the price trend remains sideways to up.
Fiscal, monetary, and trade policy disputes remain problematic with no easy answer, no quick solution, and will require ongoing multi-year attention. The United States is the only truly complete economically stable economy. The connectivity of the world has China, the European Union, and the world’s other economies slowly consuming our wealth and global position, which is what the over simplistically stated trade disputes are about.
Market Outlook for the Week Beginning September 23, 2019
Soybeans. Larger Price Trend Remains in a Sideways Trading Range. The September 20, 2019 close was $8.83 per bushel, down 16 cents on the week or down 1.78 percent. Closing below $8.50 per bushel opens the possibility of revisiting the $8.00 per bushel area. An exit of short positions at November $8.34 is one consideration. Soybean prices likely remain in their 12-plus month trading range of $7.95 to $9.39 per bushel, Charts B10 to B13.
Long Grain Rice. Near Term Price Trend Remains Bullish. September 20, 2019 November futures close $12.31 per cwt. or $5.54 per bushel. November prices closing below $11.47 per cwt or $5.16 per bushel would warrant caution. USDA’s WASDE September 12, 2019 report was friendly to sustaining the near-term bullish price trend, but future export demand will largely define price strength, Charts B18 to B20.
Corn. Near Term Price Trend Remains Bearish. Corn closed the week of September 16, 2019 at $3.71 per bushel, up 2 cents for the week or up 0.54 percent. Expect anemic prices, until fundamentals are more supportive of higher prices with a possible decline to $3.01 per bushel. If corn ends the week of September 23, 2019 above $3.78 per bushel, then I will consider a near term bottom possibly in place, Charts B14 to B17.
Wheat. Near Term Price Trend Remains Down. Wheat closed the week of September 16, 2019 at $4.84 per bushel, up 0.75 cents on the week or up 0.16 percent. Wheat prices need to end the week of September 23, 2019 above key resistance of $5.08 per bushel for me to favor additional price strength, Charts B25 to B28.
Cotton. Price weakness remains problematic. The September 20, 2019 close 60.52 cents per pound, down 1.76 cents on the week or down 2.83 percent. Cotton prices need to end the week of September 23, 2019 holding above 55 cents per pound or additional serious price weakness could emerge, Charts B21 to B24.
Interest Rates. 10-Year U.S. Treasury Yield: September 20, 2019 close 1.74, down 0.16 on the week or down 8.42 percent, Charts A1 to A4.
There is little support for the 10-Year Treasury Yield until the previous low made in 2016 is reached at 1.37 and given time further downside to 1.00 or lower now becomes a real possibility. The November 2018 high was 3.24 percent.
The Federal Reserve’s Federal Open Market Committee lowered the fed funds rate by 0.25 percent or 25 basis points to 2.0 percent on September 18, 2019, 2019’s second rate cut. This follows 9 rate increases since December 2015.
The Rate Cut Should Have Been Larger. Federal Reserve Bank of St. Louis President, James Bullard made a strong argument for a larger rate cut. Since I agree with much of his reasoning for a larger rate decrease, I am including his statement.
The following is a statement by Federal Reserve Bank of St. Louis President Jim Bullard explaining his dissenting vote at the FOMC’s Sept. 17-18, 2019, meeting:
“I dissented with the Federal Open Market Committee (FOMC) decision announced on Sept. 18, 2019, to lower the target range for the federal funds rate by 25 basis points to 1.75 percent to 2.00 percent. In my view, lowering the target range by 50 basis points to 1.50 percent to 1.75 percent would have been a more appropriate action. The following considerations factored into my decision.
“First, there are signs that U.S. economic growth is expected to slow in the near horizon. Trade policy uncertainty remains elevated, U.S. manufacturing already appears in recession, and many estimates of recession probabilities have risen from low to moderate levels. Moreover, the yield curve is inverted, and our policy rate remains above government bond yields for nearly every country in the G-7.
“Second, core and headline personal consumption expenditures (PCE) inflation measures continue to run some 40 to 60 basis points, respectively, below the FOMC’s 2 percent inflation target. Market-based measures of inflation expectations continue to indicate expected longer-term inflation rates substantially below the Committee’s target. This is occurring despite the 25 basis point cut in July and the 25 basis point cut that was expected for the September meeting. While the unemployment rate is low by historical standards, there is little evidence that low unemployment poses a significant inflation risk in the current environment.
“In light of these developments, I believe that lowering the target range for the federal funds rate by 50 basis points at this time would provide insurance against further declines in expected inflation and a slowing economy subject to elevated downside risks. It is prudent risk management, in my view, to cut the policy rate aggressively now and then later increase it should the downside risks not materialize. At the same time, a 50 basis point cut at this time would help promote a more rapid return of inflation and inflation expectations to target.
“Although I disagreed with the Committee’s decision to lower its target range by only 25 basis points, I remain confident that the Committee will continue to monitor economic developments and respond accordingly as economic circumstances dictate. I look forward to working with my colleagues to fulfill the FOMC’s mandates.”
U.S. Dollar Index. Larger Trend Sideways to Up. The U.S. Dollar Index increased 0.31 percent the week of September 16, 2019, up 0.31 to close at 98.41. Dollar Bulls see global money increasingly flowing into the U.S. as a safe haven. Dollar Bears anticipate continued accommodation by the Federal Reserve, reflation emerging, and the Bank of China, European Central Bank and the Bank of Japan elevating stimulus activities providing the dollar with some potential weakness, Charts A5 to A8.
Much of the world’s debt is dominated in dollars, especially frontier countries and emerging markets. Thus, a lower dollar is supportive of U.S. economic activity and global economies in general. What’s the negative to a lower dollar? A lower dollar may also be supportive of a number of building global asset bubbles.
$WTIC Light Crude Oil. Prices Trading in a Range. September 20, 2019 close $58.09 per barrel, up $3.24 per barrel or up 5.91 percent for the week. Present near-term trading range $51.26 to $61.98 per barrel. After the attack on the Saudi refinery the oil market will now likely add a risk price premium of $3.00 to $5.00 per barrel, Charts B6 to B9.
Geopolitical uncertainties, political dynamics, coupled with possible supply disruptions make this market unpredictable for the world’s most talented analysts, so be highly respectful of price action. Do not try to outthink this market, just follow the price action.
No Crystal Ball
Since no one has a crystal ball or knows the future always consult an investment professional or professionals before making investment decisions. The world’s most talented speculators, investors and money managers are challenged by today’s global business environment.
Robert Coats, Ph.D.
- Economist, Arkansas Department of Agriculture, 1 Natural Resources Drive, Little Rock, Arkansas firstname.lastname@example.org
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