Initially the treasury markets were flat-footed following the nonfarm payroll release but eventually spiked higher to the highest levels since December 20th. Apparently, the trade widely discounted the better-than-expected payrolls, the decline in the US unemployment rate and a stronger than expected labor force participation rate to fully embrace a moderation of wage inflation. In retrospect, the treasury trade early this week reconfirmed the primary focus is on the ebb and flow of inflation and not as much on the health of the economy. Clearly, there has been a positive shift in global economic sentiment with forecasts of soft landings surfacing from both sides of the Atlantic.
With the failure to hold a fourth straight day of strong gains in the face of a generally positive US jobs report, the dollar index became short-term overbought into last week’s highs, and perhaps some longs saw the softest nonfarm payroll reading since December 2021 as a sign to bank profits. However, the recent pattern of US economic data favors the bull camp in the dollar until the US CPI release on January 12th. The bullish shift in sentiment in the dollar off the late December low has been definitively reversed from a combination of forecasts of soft landings by economists, another sign of moderating inflation from US wages and perhaps to a lesser degree from improved sentiment flowing from China.
However, in a strange twist of historical fundamental trading patterns, persistent declines in the dollar ahead will require “soft US CPI” on Thursday. With the euro seeing a forecast for a soft European landing, economic views toward the euro zone have improved while classic fundamental pressure is returning to the dollar index. The failure of the Yen to sustain initial strength in the face of noted dollar weakness indicates the Yen is not poised to rally with the euro, Swiss franc, and Pound. Apparently, the Pound is embracing chatter of the potential for soft landing in some global areas ahead despite a lack of fresh bullish fundamental news from the UK.
In retrospect, we are very surprised with the stock market’s ability to react positively to the US December jobs report. While the jobs report could be interpreted as good or bad, we think the report was much closer to “good” than “bad”. Therefore, the markets judge the report as a “Goldilocks” report which underpins fears of recession and is not likely to increase the hawkishness of the US Fed. On the other hand, sentiment among traders and investors is negative or guarded at a time of the year where optimism is usually present. Global equity markets overnight were higher except for the markets in London, Paris, and Madrid.
Clearly, the S&P has and continues to embrace the “hope” of a US Federal Reserve pivot from the “Goldilocks” US jobs data. Not surprisingly, the Dow futures have also extended last week’s very strong finish/upside breakout and should have the technical and fundamental fuel to rally above 34,000. Not surprisingly, the NASDAQ has lagged the rest of the markets on the current recovery wave.
GOLD, SILVER & PLATINUM:
With the upside breakout in gold prices early this week, the market should attract positive headline coverage, especially with growing hope for soft landings surfacing from economists on both sides of the Atlantic. Apparently, the gold and silver markets have become more patient with significant gyrations in the US Dollar seemingly resulting in a return to the downtrend status in place prior to the recovery last week. Clearly, several US financial markets at the end of last week took the US jobs data and have begun to look for a case to bring the Fed to a less hawkish stance. In our opinion, the jobs data Friday, and data over the last several weeks have been “Goldilocks data” which for equities, gold, treasuries, and many physical commodities could be the best overall market condition for the coming quarter.
While the palladium market bounced from consolidation support levels just above the $1,700 level last week, the market continues to face neutral to bearish fundamentals. Furthermore, it seems that 2023 will bring about the rotation of industrial demand from expensive palladium to cheaper platinum. As indicated several times this year, platinum displayed very impressive action on its charts since last September and has significantly outperformed palladium on the upside.
Not only has the copper market managed to hold up impressively in the face of what continues to be a major threat against Chinese copper demand, it has now jumped to the highest levels since the middle of June in a fashion that suggests the trade has somehow become comfortable with Covid uncertainty. Certainly, the bulls were inspired by news last week that the Chinese government was aiding the beleaguered Chinese real estate sector. However, economic sentiment in China has been improved further this morning with reports of Chinese travelers flooding airports following the government’s lifting of certain travel restrictions. Obviously, copper will continue to benefit from supportive outside market influences like a weaker dollar, steady interest rates and from recent “Goldilocks” US jobs data.
The extension of last week’s bounce in the crude oil is easily attributable to the improvement in global sentiment from soft landing forecasts, reports of a surge in Chinese travel and from a 2nd Chinese import quota which puts 2023 import quotas ahead of the pace seen early in 2022. Adding into the sentiment shift is a 5.9% decline in weekly crude oil in floating storage and a downside breakout in the US dollar. Therefore, we suspect Brent crude oil, and WTI crude oil ETF instruments will see renewed inflows especially after Bloomberg estimates overnight of $1 billion of inflows into Brent ETF instruments this week. However, daily energy demand concerns have also been offset by the threat of production cutbacks from OPEC+. Keep in mind that OPEC+ last month indicated they would be proactive and aggressive in supporting prices.
While the gasoline market strength early this week was less impressive than the strength seen in the crude oil market, signs of strong Indian December fuel consumption (fuel sales up 3.1% and diesel sales up 6.5%), improved overall market sentiment and reports of significant Chinese travel activity provides the bull camp with a fresh bullish fundamental condition to start the new trading week.
With the natural gas market in freefall last week, it is apparent that many fundamentals (mild temperatures and no restart date for the Freeport export facility) leave the bear camp in control.
While the soybean market experienced bearish technical action for the first week of January, the Argentina forecast is still too dry, and stressful conditions continue for a high percentage of the Argentina and southern Brazil crop. March soybeans closed sharply higher on the session Friday and even took out Thursday’s high. The weather outlook is uncertain and traders are nervous that a continued drier than normal trend over the next 2 to 3 weeks could cause significant production losses for Argentina. The surge higher in the US stock market along with a very sharp break for the US dollar were seen as positive forces as well. Export news was disappointing.
The weather is threatening and buyers could get more active. March corn managed to close slightly higher on the session last Friday but the market closed well off of the highs. Outside market forces were bullish for the market with a collapse in the US dollar and a surge higher in the US stock market. Demand news remains sluggish and the trade remains very uncertain over the Argentina crop situation for this week, and especially for the next few weeks. For the USDA supply/demand report, traders see corn ending stocks near 1.314 billion bushels, 1.181-1.400 billion range, as compared with 1.257 billion bushels in December.
March wheat closed lower on the session last Friday and near the lows of the day after spending most of the session higher. Strength in the other grains plus a sharp drop in the US dollar and strength in other commodity markets helped to support. Continued talk of the record high Russia wheat crop along with ideas that the Australia crop will also be a record high and that Europe has plenty of wheat for export helped to pressure as well. Export sales news was quite negative. The weekly export sales report showed that for the week ending December 29, net wheat sales came in at 47,142 tonnes for the current marketing year and 97,000 for the next marketing year for a total of 144,142 tonnes. Cumulative sales have reached 71.0% of the USDA forecast for the 2022/2023 marketing year versus a 5 year average of 74.2%. For the US winter wheat Seedings report, traders see All Winter Wheat plantings near 34.5 million acres, 33.2-36.2 million range, as compared with 33.3 million acres in 2022.
The hog market remains in a steep downtrend and getting to an oversold condition. February hogs traded sharply lower on the session Friday and the selling pushed the market down to the lowest level since October 7th. Average weights jumped significantly during the storm and this has helped to cause an increase in pork production over the short run. The USDA pork cutout, released after the close Friday, came in at $82.77, up 3 cents from Thursday but down from $86.85 the previous week. The CME Lean Hog Index was 78.26, down from 79.06 the previous session and 80.69 a week prior. The USDA estimated hog slaughter came in at 453,000 head Friday and 420,000 head for Saturday. This brought the total for last week to 2.296 million head, up from 2.194 million the previous week but down from 2.552 million a year ago.
The cattle market is still under the bearish technical influence of the December 30th key reversal for August cattle. Demand concerns persist and this has kept buyers at bay. However, the supply outlook remains a bullish force which should emerge on breaks to provide support. February cattle closed moderately lower on the session Friday and the selling pushed the market down to the lowest level since December 21st. A supportive tilt to outside market forces has failed to provide much in the way of support. Average weights have come down and the market seems to have the supply fundamentals to remain in a short-term uptrend. The USDA boxed beef cutout was up $1.60 at mid-session Friday and closed $1.36 higher at $282.99. This was up from $278.86 the previous week.
Cocoa prices had a volatile start to the year, but the market continues to have a bullish fundamental setup. If global risk sentiment and key outside market can regain a positive tone, cocoa should be able to regain and sustain upside momentum. March cocoa was able to rebound from early pressure but could not climb up into positive territory as it finished Friday’s trading session with a moderate loss. For the week, however, March cocoa finished with a gain of 5 points (up 0.2%) which was a second positive weekly result over the past 3 weeks.
While the coffee market has received bullish supply news, prices have shown few signs of putting in a longer-term low. Until demand concerns are soothed, the coffee market is vulnerable to further downside. March coffee was unable to hold onto early strength as it fell to a 3 1/2 week low before finishing Friday’s trading session with a sizable loss. For the week, March coffee finished with a loss of 9.00 cents (down 5.4%) which was a second negative weekly result in a row.
March cotton managed to hold minor support levels last week and experienced the highest close since December 21st on Friday. Nearby contracts led the rally which is a positive development, as traders continue to believe that cotton demand will gradually improve. The surge higher in the stock market and a sharp break in the US dollar were seen as supportive forces. Talk of the oversold condition of the market plus talk that there was some increase in activity in the cash market were factors which added to the positive tone.
Sugar prices had an abrupt change in fortune going into 2023 as they lost over 2 cents in value since the Christmas holiday weekend. While it is receiving carryover support from key outside markets, sugar needs a significant shift in its supply outlook to put some brakes on this current downdraft. March sugar maintained downside momentum as it reached an 8-week low before finishing Friday’s trading session with a sizable loss. For the week, March sugar finished with a loss of 1.08 cents (down 5.4%) which was a second sizable weekly loss in a row.
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