While the Treasury bond market forged a lower low and the lowest trade since July 21st, the market was able to reject that washout in regain the psychologically important 140-00 level. Certainly, the market was undermined early by the positive start in the US equity markets but should have seen pressure following hawkish dialogue from the Richmond Federal Reserve Bank President suggesting he wanted rates to rise further to make sure inflation was snuffed out. However, seeing 3 separate inflation readings confirm softening inflation views from earlier in the week probably serve to lift treasuries off their lows.
Despite evidence of softening inflation from US import and export price readings, signs of softer pricing in a Michigan sentiment report and definitive damage on the charts from earlier in the week, the dollar hooked up sharply and regained 50% of its loss on the week. Obviously, the British pound was undermined by its disappointing GDP and industrial readings released overnight and it is also likely that the Pound continues to be held to task for its status as a “recovery currency”.
The Dollar has followed through on last Friday’s rebound with sizable gains at the start of this week’s action. A disappointing set of Chinese economic numbers has diminished global risk sentiment, and that in turn has sent a wave of safe-haven inflows towards the Dollar this morning.
The Euro remained on the defensive as it has posted sizable losses early this week. A negative monthly reading for the German wholesale price index reflects a pullback in Euro zone inflation levels that could put some brakes on potential ECB rate hikes later this year. The Yen is finding modest early support at the start of this week, but it remains in a fairly tight range well below last week’s high and the early August high. While the Yen received fresh support from safe-haven inflows, that has been offset by lower than expected Japanese GDP and a negative Japanese industrial production result. The Pound was on-track for a third negative daily result in a row as it reached a 1-week low early in today’s action. While last Friday’s readings for UK GDP and UK industrial production came in above estimates, they were not enough to underpin the Pound in front of Tuesday’s UK jobs data and Wednesday’s increasingly critical UK CPI and PPI reading.
In retrospect, the equity markets certainly squeezed every ounce of benefit from this week’s softer inflation readings. While there might be some consternation about the loss of 5 Chinese state-owned companies’ listings on the NYSE, we suspect a large portion of those investors will exit those shares and seek similar investments in companies at the NYSE. The markets were also lifted today by high-tech and growth-related shares and from higher deliveries/revenues from upstart Rivian. The markets were also lifted by news that the S&P Index had recovered 50% of its 2022 washout which some say is a signal of the end of a bear market and the beginning of a bull market.
While the S&P has gained back more than 50% of the 2022 break, it may be difficult to rationalize a further advance, and the news flow so far this week looks quite negative. The China economic news is poor, and they are cutting rates hoping to spark a recovery.
Technical readings for the Dow are showing an extreme overbought condition for most of the month of August. The market looks vulnerable to a correction. The September E-mini NASDAQ is also in an overbought mode, and looks vulnerable to at least a correction.
GOLD, SILVER & PLATINUM:
Gold set back at the start of this week after a brief fling with the upside on Friday. While Friday’s move higher in the face of a stronger dollar was impressive, it could not maintain in the face of another move higher in the dollar early this week. The disappointing economic data out of China and China’s central bank cut unexpectedly cutting its key interest rate shows a weaker than expected economy, which lowers demand expectations for gold. Chinese industrial production rose 3.8% from year ago in July, well short of the 4.5% expected. The July Fed meeting minutes release this could provide a hint to whether the Fed will increase 50 or 75 basis points in September. After last week’s inflation data suggesting it had peaked, there was some talk the hike would only be 50 basis points.
September palladium was dealt another setback early this week after the weak Chinese data raised concerns about auto sales and chip production. The weaker close on Friday following the upside breakout last week was also a disappointment, but the setback so far has been mild relative to the gains the market has made since mid-July. September palladium has gotten a bit overbought near term and it could see a correction back to $2,100 without doing much damage to the charts. October platinum has also gotten overbought following its steady uptrend off the July lows, and it too was sharply lower at the start of this week.
Copper has likely seen the most consistent uptrend of the commodity market sector since mid-July, but a loss of upside momentum on Friday led to considerable downside follow-through early this week. The July Chinese industrial production reading was lower than expected, and July Chinese retail sales had a surprise downtick, both of which may show evidence of a slowing Chinese economy that weighs on copper demand. September copper finished Friday trading with a heavy loss and a negative daily reversal, but it still finished the week with a gain of 11.65 cents (+3.3%) for the third positive week in the past four.
Crude oil and its products were under pressure early this week, with front-month crude oil back to within striking distance of making new five-month lows. A poor set of Chinese data ramped up concerns that their economy may be slowing again, and that has put demand destruction back into the headlines. On Friday, the crude oil market seemed to reevaluate the optimistic on demand expectations that came in the wake of the softer inflation readings last week. Those reading are unlikely to markedly change the Fed’s decision at next month’s FOMC meeting, which could leave recession worries in place. September crude finished Friday with a heavy loss, but the market finished the week with a $3.08 gain (up 3.5%) for the third positive weekly in the past four. There were positive comments from Iran on the EU’s updated proposal for a nuclear deal, and that increases the chances that all sides (including the US) can come to an agreement soon.
Like crude oil, both product markets have fallen back on the defensive on concerns about demand. US gasoline stocks saw a significant decline in last week’s EIA report, but average US pump prices for regular unleaded are more than $1.10 per gallon below their June high, and they are back below $4.00. Implied gasoline demand jumped back above the 9 million bpd level, but it is still below where it was last summer. In contrast, ULSD continues to find support from tight distillate supplies in Europe, due largely to a reduction in imports from Russia.
Natural gas prices are taking a breather after a sharp three-day rally last week. The market finished Friday with an inside-day session and a moderate loss, but it posted a positive weekly reversal from last Monday’s three-week low. Strong demand for LNG imports in Europe and Asia helped provide support, but US dry gas production reached a record high last Monday and US LNG exports continue to be restricted by the Freeport shutdown. The latest 6-10 and 8-14-day forecasts have above normal temperatures in the Pacific Northwest and New England but below normal temperatures over the south central and southeastern US. This is expected to lower US power plant demand significantly this week.
The USDA report news was bearish, and November soybeans sold off in the immediate aftermath of the report, but managed to bounce off the lows and traded through Thursday’s high and close higher on the day to form an outside day higher. However, a 6% drop in palm oil and a cooler and wetter forecast on top of the bearish USDA news sparked aggressive selling early this week. The report showed US soybean ending stocks for 2022/23 came at 245 million bushels versus an average expectation of 225 million and 230 million in July.
Corn followed soybeans lower and sold off in the immediate aftermath of the USDA report, but it quickly recovered as the report carried a bullish tilt for corn. The close above 639 3/4 for December corn Friday was a bullish development but there was no follow-through early this week. US corn ending stocks for 2022/23 came in at 1.388 billion bushels versus an average trade expectation of 1.407 billion and 1.470 billion in the July report. The USDA lowered yield to 175.4 bushels per acre from 177 previously. Exports were revised lower, and so was feed usage, but the lower yield helped tighten the ending stocks forecast. The December contract reached to its highest level since July 11.
A collapse in energy prices plus weakness in the other grains and a surge higher in the US dollar are seen as bearish forces. September wheat closed lower on the session Friday but well up from the lows and the other wheats closed just slightly lower on the day after selling off sharply in the wake of the USDA report. Production came in lower than expected, and ending stocks came in near the low end of trade expectations. The report showed US 2022/23 all wheat production at 1.783 billion bushels, which was below an average expectation of 1.796 billion but up from the July estimate of 1.781 billion. Ending stocks came in at 610 million bushels versus 650 million expected and 639 million in June.
This would be the lowest ending stocks since the 2013/14 season.
October hogs gapped lower Friday morning on apparent profit taking.
Technical indicators are showing an extremely overbought condition, and the market sees choppy trade in pork product prices as a sign of potential weakness. However, the futures are still trading at a wider than normal discount to the cash market, and weights are at their lowest level since 2017. The USDA pork cutout, released after the close Friday, came in at $120.41, down $1.41 from Thursday and down from $124.03 the previous week. This was the lowest the cutout had been since July 18. The CME Lean Hog Index was 121.86 on August 10, down from 122.09 the previous session but up from 121.61 a week prior.
Talk of an overbought technical condition and sloppy trade in beef prices recently may have been what sparked selling in live cattle late last week. Cash live cattle trade was light on Friday, but the five-day, five-area weighted average price as of Friday afternoon was $143.96, up from $140.35 the previous week. The USDA boxed beef cutout was up 22 cents at mid-session Friday and closed 27 cents higher at $263.37, but this was down from $264.62 the previous week. There is plenty of moisture in the 6-10 and 8-14-day forecasts for the central and southern Plains, which could ease cow and non-fed cattle slaughter.
Since the start of the second quarter, cocoa prices have been pressured by concerns about global demand. However, second quarter grindings for Europe and Asia showed year-over-year gains and the largest second quarter readings on record while Ivory Coast (the world’s top cocoa processing nation) is projected to have record grindings this year. December cocoa came under early pressure and fell back below the 50-day moving average as it finished Friday’s trading session with a sizable loss that broke a 4-day winning streak. For the week, however, December cocoa finished with a gain of 53 points (up 2.3%) which was a second positive weekly result over the past 3 weeks.
Coffee prices have been able to break out of their coiling price pattern and now have closed above their 50-day and 100-day moving averages for a second session in a row. While demand concerns have not been fully soothed, coffee’s bullish supply factor can help the market to extend this recovery move. December coffee shook off early pressure and rallied to a 6 week high before finishing Friday’s trading session with a moderate gain and a fifth positive daily result in a row. For the week, December coffee finished with a gain of 16.00 cents (up 7.8%) which was a third positive weekly result over the past 4 weeks.
The USDA supply/demand report on Friday was bullish, and the release of the report immediately sent December cotton up the daily limit, where it stayed the rest of the day. The market gapped higher this morning and is trading up the 5 cent limit early. The report showed US 2022/23 cotton production at 12.57 million bales versus an average trade expectation of 14.75 million and a range of expectations from 14.00 to 15.75 million. This was down from the July estimate of 15.50 million and well below the bottom end of the expected range. US ending stocks came in at 1.80 million bales versus 2.17 million expected (range 1.90-2.50 million) and down from 2.40 million in July. This brings the stocks/usage ratio down to 12.6%, down from 20.3% in 2021/22 and the lowest on record going back to 1960/61.
Sugar’s longer-term trend has seen a positive turnaround with the market starting out August with 9 positive daily results over the first 10 sessions of the month. Key outside markets remain volatile, however, so the sugar market may be vulnerable to a near-term pullback this week. October sugar was able to bounce back from mild early pressure as it reached a new 3-week high before finishing Friday’s trading session with a moderate gain, a sixth positive daily result in a row and the first close above its 50-day moving average since mid-July. For the week, October sugar finished with a gain of 66 ticks (up 3.7%) which was a second positive weekly result in a row.
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