After aggressive gains in bonds and notes over the last several weeks from a series of soft second and third tier US economic data, a stronger than expected payroll report (first-tier) definitively repaired market views toward the US economy and that justifiably resulted in a fresh three-day low. While not substantially improving, almost every component of the US jobs report improved versus expectations, or from October! Therefore, a corrective tilt in treasuries may extend into this week.
With treasury bonds into the CPI report and a 30-year bond auction Tuesday trading four points higher than on-hold pricing, the rate cut prospect is building into pricing quickly. It should also be noted that treasury bonds into last week’s high were trading roughly 14 points above the level where the markets saw the Fed pivot from high rates for longer to on-hold.
The Dollar was able to regain upside momentum and reach a new 3-week high before finishing last Friday’s trading session with a sizable gain. A stronger than expected set of US employment data provided a boost to the Dollar as it may push FOMC rate cuts further into the future. The Canadian Dollar was able to benefit from improving sentiment and hawkish BOC commentary to finish this week’s trading on an upbeat note. The path of least resistance is up in the dollar at the start of this week as the markets still perceive the US economy to the growing and offering the best risk and reward in the current environment.
Once again, US equity markets waffled around both sides of unchanged last Friday as favorable US jobs data prompted some long profit taking from those fearful that the widely hoped for first quarter US rate cut would be pushed beyond the first quarter. However, the markets recovered into positive territory around midsession but were unable to discount a negative AI development regarding the potential for UK regulatory problems with the Microsoft and Open AI combination.
Global equity markets at the start of this week were mixed with gains generally located in Asia and the TOPIX leading the world with a gain of 1.4%. With a higher high in the early trade in the S&P, it appears the leadership role in the market has shifted from the Dow to the S&P.
After very sluggish/weak action in late November and early December the NASDAQ appears to have come back into favor even though NASDAQ company headlines have been generally discouraging with unending negative regulatory and legal issues partially eroding optimism from the hope for massive earnings from AI.
GOLD, SILVER & PLATINUM:
Given the fundamental and technical events of the last two weeks, the trend in gold and silver has shifted back in favor of the bear camp. From a technical perspective, the massive rally last week exhibited a classic blowoff top and reversal with confirmation from an explosion in trading volume and a subsequent decline in open interest. From a fundamental perspective, the mainstay of the bull case in precious metal markets since October has been a weakening dollar which now appears to have recovered especially with the market’s decision that despite signs of US slowing, the US will likely hold up better than most in the face of the lagged headwinds from the unprecedented rate hike cycle. However, the upward track in the dollar does not look to be as aggressive as was seen last summer and it is possible that falling implied treasury yields will help cushion gold and silver against $ liquidation pressure.
The silver market is presented with nearly the same bearish fundamental and technical picture as gold, with added fundamental bearishness seen from the threat of sagging physical demand because of sagging global industrial activity.
In retrospect, the copper market has displayed significant two-sided volatility recently as the outlook for the Chinese economy has waffled between concerning and slightly hopeful. However, the global economic outlook is now softening and therefore economic signals from China have become even more important in determining daily copper prices.
Despite a three day high early this week, the prevailing trend in the oil market remains down with demand suspicions and a lack of respect for OPEC+ cuts leaving the bear camp confident. In fact, global floating oil storage increased by 11% over last week, with Bloomberg coverage overnight suggesting US production expansion next year will offset most if not all production restraint efforts by OPEC+. Granted, there is some energy demand hope flowing from residual strength in global equities and from psychological support from news that the US will continue to rebuild its strategic supply, but that support has its limits. In fact, Chinese refinery demand for oil from the Saudi national oil company for next month will be the lowest in five months rekindling the bear edge in the market to start the new week. Like the petroleum markets, the best chance of a bottom in natural gas is a complete exhaustion of speculative selling.
South American weather, demand and the platform of the new Argentine President will be the focus after a neutral USDA report Friday. Brazil rains are expected to underperform this week with better chances continuing to be pushed out into the 10 to 15 day extended outlook. Argentina, on the other hand, is expected to see good rains late this week. At the COP28 climate summit, the eight top commodity trading firms pledged to not buy soy from farms that ruin grasslands. Half of Brazil’s Cerrado savannah has been cleared for farms in recent years.
Better demand ideas are expected to be supportive on breaks and we give the edge to the bull camp to start the week. Despite stocks shrinking a little more than expected and an increase in US exports, Friday’s report was a non-event for corn prices. South American crops were left unchanged as the USDA decided it’s too early in the season to amend their numbers. Interestingly, the USDA’s total Brazil corn production of 129 million tonnes is at odds with CONAB’s updated estimate last week of 118.53 million tonnes.
The 8 consecutive day rally streak ended last Friday and prices were due a pullback. The important question for the market is whether or not China’s buying of US wheat is over after last week’s surge in purchases, and we think it probably is over until prices pull back, since US prices have now moved above other origins. Analysts are questioning whether USDA’s 25 million bushel increase in US exports in Friday’s report took into account last week’s China purchases of 1,120,000 tonnes. If not, or if China continues to buy this week, USDA would be expected to raise exports and tighten ending stocks further in the January report.
February hogs may find support from a stabilization in China hog prices as well as US pork prices. China’s national average spot pig price was up 3.45% today, and Dalian live hog futures were up 0.70% and up 0.35% for the month. The USDA pork cutout, released after the close Friday, came in at $84.69, up $2.74 from Thursday and up from $82.63 the previous week. This was the highest it had been since November 27. In the monthly supply/demand report, USDA raised its US 2023 pork production forecast from 27.232 billion pounds to 27.257 billion, but they left 2024 production unchanged at 27.745 billion.
February live cattle recovered on Friday after a selloff last week that took prices to their lowest level since October 2022 and to the vicinity of contract lows. Declining beef prices have kept packer margins negative, which has pressured cash cattle prices, and the funds have been active sellers. The market is technically oversold, but the futures could continue to be under pressure as beef prices work lower. In Friday’s USDA supply/demand report, US 2023 beef production was left unchanged at 27 billion pounds, but 2024 production was increased from 25.878 billion pounds to 26.058 billion.
The cocoa market continues to find support from supply issues in most of their major growing nations, while global demand has been resilient despite a 95% increase in prices since September of 2022. That may not be the case next year, however, and that leaves cocoa vulnerable to a pullback over the final weeks of 2023. March cocoa shook off early losses and climbed to a new 46-year high before finishing Friday’s outside-day trading session with a sizable gain. For the week, March cocoa finished with a gain of 70 points (up 1.7%) which was a ninth positive weekly result over the past 10 weeks.
Coffee prices were able to find their footing late last week as they posted “higher lows” on Thursday and Friday. The market spent last week’s trading well below the 6-month high posted on December 1st, however, and remains vulnerable to further downside price action going into year-end. March coffee was unable to hold onto early gains as it went on to post a mild loss for Friday’s trading session. For the week, March coffee saw a loss of 7.20 cents (down 3.9%) which broke a 2-week winning streak.
March cotton saw a brief rally upon the release of the USDA supply/demand report on Friday after US production and ending stocks came in below expectations, but the market quickly turned lower after it failed to push through key resistance at the 200-day moving average. The fundamental picture has improved slightly for cotton over the past weeks, but it may need further evidence of improving demand to extend its rally. The USDA report showed US cotton production for 2023/24 at 12.78 million bales, down from 13.09 million in the November report and below the low end of expectations.
Sugar prices were able to finish last week with their first back-to-back daily gains in 2 1/2 weeks. The market has been unable to have 3 positive daily results in a row since late October, however, and may have trouble sustaining upside momentum early this week. March sugar followed through on Thursday’s reversal as they went on to post a sizable gain for Friday’s inside-day trading session. For the week, however, March sugar finished with a loss of 1.73 cents (down 6.9%) which was a second very large weekly loss in a row and a sixth negative weekly result in a row.
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