With last week’s US inflation readings hotter than expected, and the Fed immediately hinting at higher interest rates, the Bond market’s ability to limit declines indicates bullish resiliency remains in place. However, the bull camp will simply argue that higher rates and increased economic uncertainty are justification for bullish resiliency in treasury prices. It is also possible that the trade does not see an extra 25 basis points on the terminal rate as a significant issue. Nonetheless, the treasury markets in the week technically oversold and possibly poised for lift next week from classic signs of macroeconomic slowing.
Certainly, the dollar index became short-term overbought highs and deserved a back and fill setback. However, with US equity markets mostly taking last week’s negative interest rate threats in stride, global investors might continue to see the US as the best place to be. In fact, the euro zone will produce to key inflation reports of its own this week from Germany and Italy, but it is unclear if those reports can take control from US fundamentals. While the dollar has not shown early strength this week, the path of least resistance remains up from both charts and fundamental conditions. In fact, we detect a slight elevation of economic uncertainty and that combined with expectations of hawkish news from the US Fed meeting minutes Wednesday afternoon should result in higher dollar action ahead.
Even though the euro is benefiting from ongoing expectations of additional rate hikes beyond March, traders think European rates will top this summer which is earlier than the expected top in US rates. While Japanese interest rates registered one-month highs, Japanese bond prices were lifted overnight because of the first looming testimony of the new Bank of Japan Gov. to the Japanese parliament.
Even though internal domestic economic data has had little impact on the Swiss franc, import and export data for January was much stronger than in December and that could help solidify consolidation low support. In addition to extended respect of consolidation lows at 1.20, the Pound is likely garnering support from favorable S&P global/CIPS composite, manufacturing, and services PMI data for February.
While the bull camp in equities is not out of the woods yet, the markets’ capacity to avoid a major washout in the wake of last week’s inflation news is very impressive. Fortunately for the bull camp, interest rates halted their recent jump and Deere & Company helped the market out with good results and positive guidance. In the end, it is possible that investors are not unnerved because of the potential for slightly higher terminal rates at the end of the year. On the other hand, it is possible that the markets after consideration of the pace of the economy and the need to raise US rates further might result in large declines this week.
With a lower low and an approach of the February low the path of least resistance in the S&P is down to start the holiday shortened week. With recent Boeing sales news positive, the Dow futures might have a minimal cushion against a trade below 33,500 in the coming sessions.
GOLD, SILVER & PLATINUM:
While April gold managed a 3-day high and attempted to sustain a trade above $1850, it ultimately fell $14 from its early-week high. Some of the early weakness in gold is likely attributable to minimal strength in the dollar, risk off in global equity markets and slightly higher treasury yields. Unfortunately for the bull camp, the market is confronted with a 7.6% decline in Swiss gold exports in January, with Chinese imports down 58% and Indian imports down by 33%! With the low at the end of last week $150 below the early February high the net spec and fund long positioning in gold has probably moderated significantly from the last reading in January of 206,016 contracts long. However, due to a hacking incident weekly COT report readings have been suspended and the trade is left to estimate market positioning.
Despite a risk off vibe in financial and many physical commodities markets at the start of this week, the copper market has extended last week’s sharp recovery move and nearly tested the February high. While the COT report has been suspended due to hacking, the last spec positioning report showed a relatively low net long with the market currently sitting $0.05 below the level where that positioning was last measured.
An escalation of political tensions between Russia and the allies combined with rumors China will supply military equipment to Russia should provide cushion for crude oil at the $75.00 level. While the US, EU and the United Nations are unlikely to punish China for a direct support of Russia, that potential could interject some supply-side premium to energy prices ahead. Unfortunately for the bull camp crude oil starts the trading week facing deteriorating global economic sentiment which in turn questions positive demand projections. Furthermore, Asian demand expectations and prices moderated at the start of this week, reportedly from heavy arbitrage action.
From a technical perspective, the gasoline market last Friday aggressively rejected a significant washout on strong volume and that could discourage the bear camp. However, prospects of improving Chinese fuel demand which in turn reduces fuel exports helps to offset last week’s significant correction.
Dry conditions in Argentina and reports of frost over the weekend may have caused some damage to immature corn and soybeans and this helped to support the market at the start of this week. Any showers will be limited for the rest of February, keeping stresses high for both crops. Another burst of heat could come next week. Scattered showers continue for central and northern Brazil, where breaks in the heavy showers are few and far between. Soybean harvest and safrinha corn planting remain behind schedule. May soybeans closed slightly higher on the session Friday but down near 11 1/4 cents on the week. Meal closed slightly lower as well and down on the week while May soybean oil closed lower on the session but higher for the week. The forecast is dry for Argentina but cool, and the trade believes that some additional damage may be possible to the crop, but this could be offset by a large Brazil crop.
Dry conditions in Argentina and reports of frost over the weekend may have caused some damage to immature corn and soybeans and this helped to support the market overnight. Any showers will be limited for the rest of February, keeping stresses high for both crops. Another burst of heat could come next week. Scattered showers continue for central and northern Brazil, where breaks in the heavy showers are few and far between. Soybean harvest and safrinha corn planting remain behind schedule. If the delays are too great this week and next week, as they are forecast to be, safrinha corn will be more exposed to the dry season in a couple of months, which may include pollination. May corn traded higher on the session Friday but still closed slightly lower on the week.
May wheat closed unchanged on the session last Friday after choppy and two-sided trade. Traders await developments on whether or not Ukraine exports will continue to flow freely, and also the USDA’s first look at new crop plantings and production expectations from the Outlook Forum. Traders also await any updates on the weather pattern for early March when the US winter wheat crop comes out dormancy. From a Bloomberg survey, traders see wheat planted area for the 23/24 season near 48.5 million acres, 46.0-50.0 range, as compared with 45.7 million last year. Production is expected near 1.882 billion bushels, 1.696-1.995 range, as compared with 1.650 billion bushels this past season. Ending stocks are expected near 646 million bushels, 544-780 range, as compared with 568 million bushels this year. Canadian officials see wheat production for the 23/24 season near 34.327 million tons as compared with 33.824 million this season.
The supply fundamentals for hogs look bearish, and the market may be setting up for a contra-seasonal move lower. However, with the jump in pork values and better than expected export sales news this past week, it may see a further advance over the near term. April hogs closed lower on the session Friday after a strong rally early in the day. The jump in pork cutout values last week was a reason to expect a firm trade in the cash market and this helped to support. Strength in the cattle market and ideas that the market is still hoping for a seasonal advance at this time of the year helped to support. April Hog basis as of February 15 was still showing a premium of 10.38 to the cash market. This was close to the 10.39 premium a year ago, but well above the five-year average of 5.65 for this time of year. If April Hogs were trading at the five-year average basis, the market would be trading near 81.45.
Estimated beef production last week was 517.5 million pounds, down 8% from last year. The tightening supply situation continues to support the uptrend. April cattle closed higher on the session Friday and the buying pushed the market up to a new contract high. Strength in the cash market plus the jump in beef prices which might push cash higher this week were seen as positive forces. In addition, packer profit margins are strong and this could help to keep the cash trend up. June cattle also traded higher but still shy of the February 7 peak, and August cattle is well shy of the contract high. The USDA boxed beef cutout closed $1.49 higher on Friday at $281.04. This was up from $269.66 the previous week and the highest since January 10. The cutout was up $1.26 at mid-session yesterday and closed $1.85 higher at $282.89. This was up from $269.95 the previous week. This was the highest the cutout had been since January 10. Cash live cattle trade was quiet on Monday with no trades reported. The five-day weighted average steer price last week was $161.17, up from $159.62 the previous week and $142.36 a year ago.
May cocoa’s rally last week took the market well above its previous contract high from February 2022. While it is technically overbought and vulnerable to a near-term pullback, near-term supply issues will continue to underpin cocoa prices this week. May cocoa continued to build onto early support as it reached a new 2023 high before finishing Friday’s trading session with a moderate gain and a fifth positive daily result in a row. For the week, May cocoa finished with a gain of 165 points (up 6.3%) which broke a 2-week losing streak. Market concern that several Ivory Coast firms may default on export contracts were given added weight by comments by an official from that nation’s Coffee and Cocoa Board late last week. In contrast to previous exporter defaults due to a lack of financing, this current threat is due to unusually tight near-term cocoa bean supplies.
Coffee prices continue to face near-term demand concerns that may be given added strength from this week’s economic data in Europe and the US. With the market seeing evidence of tighter near-term supply, however, coffee should hold its ground above its early February high. May coffee Coffee prices shook off early pressure and reached a 3 1/2 month high before finishing Friday’s trading session with a sizable gain. For the week, May coffee finished with a gain of 11.10 cents (up 6.3%) which was a fifth positive weekly result in a row. ICE exchange coffee stocks fell by 8,374 bags on Friday, which was their seventh daily decline in a row. ICE exchange coffee stocks are now than 29,000 bags below their January month-end total with no coffee waiting to be graded, which increases the likelihood of their first monthly decline since October.
The cotton market is following the grains early this week as traders see the break last week as too far, too fast. The longer-term demand fundamentals still look negative but short-term demand factors are positive and the outlook for a sharp drop in planted area may help support. However, traders see a jump in production even if planting drops. From a Bloomberg survey, traders expect cotton planted area near 11.4 million acres, 10.0-13.5 range, as compared with 13.8 million acres last year. Production is expected near 16 million bales, 14.0-19.0 range, as compared with 14.7 million this year. Ending stocks are expected near 4.7 million bales, 2.9-6.4 range, as compared with 4.3 million this year.
The sugar market continues to receive bullish supply updates from India which may be heading towards a sizable production decline from last season. Sugar prices remain well below their early February highs, however, and are vulnerable to a downside breakout from their recent consolidation zone. May sugar continued to see coiling action as it found early support before turning back to the downside late in the day to finish Friday’s trading session with a modest gain. For the week, however, May sugar finished with a loss of 24 ticks (down 1.2%) for a first negative weekly result since early January. A sizable rebound in the Brazilian currency provided sugar prices with early carryover support as that eases pressure on mills to produce sugar for export.
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