In retrospect, the moderate washout in bond and note prices last Friday following the US PPI report was probably mostly the result of the overbought position from the recent run-up, and to a lesser degree because of the lingering inflation signals in the report. However, the bear camp saw added assistance from a much stronger than expected University of Michigan Consumer Sentiment Index preliminary reading for December. In fact, the Michigan reading for early December was 59.1 versus 56.8 last month! The treasury market is extremely buoyant with corrections met with aggressive recoveries. In fact, the treasury markets have consistently respected uptrend channel support lines and have generally discounted better than expected economic reports and embraced softer than expected economic reports.
Certainly, the dollar deserved to bounce late last week following minor signs of lingering inflation in the US PPI report. However, the trade appears to be looking forward and anticipating the Fed will be successful with a portion of the currency markets beginning to think the upside terminal rate in US is falling. On the other hand, with mixed economic data and the looming FOMC meeting, it is possible that currencies will be restricted to range trading until the middle of this week. From a technical perspective, it appears the dollar has settled below its 200-day moving average which is pegged at 105.40.
With the dollar index generally off balance over the past 40 days the currency markets have factored in a moderation of inflation and therefore tomorrow’s CPI report is likely the most significant report for the rest of this year. While the pattern of higher highs and higher lows in the euro is not overwhelming, combined with a persistent trade above the 200-day moving average (104.65) leaves the technical set up in favor of the bull camp. While the Yen has not traded in lockstep with Japanese domestic data, the bear camp should be emboldened by Monday’s significant decline in large manufacturing conditions index readings for the 4th quarter. As mentioned several times last week, the Pound remains the most uniform uptrend in currency markets, and we see that bullish tilt accentuated by this week’s economic data flow.
The US equity markets opened higher last Friday following a sweep of positive international equity market action, but because the PPI report contained a few problematic inflation readings, US markets saw a significant reversal after the report. On the other hand, the markets rebounded into midsession and the lingering heat from inflation in the PPI report is unlikely to push the Fed needle back toward the 75-basis point hike level. In a disappointing reaction, the equity markets failed to benefit from rumors of a large United airlines 787 Dreamliner purchase from Boeing.
Despite favorable news of Microsoft’s investment in the London Stock Exchange, the Dow Jones futures posted a damaging trade in the early going with the failure to hold consolidation low support. Like other sectors of the market the NASDAQ sits right on critical chart support, but we expect that support to fail.
GOLD, SILVER & PLATINUM:
Without clear direction from the dollar, a risk-off vibe being thrown off by international equities and looming central bank action, the gold and silver trade are likely seeing some longs exit ahead of impending volatility. However, the trade saw the sharp jump in ongoing claims last week as a development likely to cement a 50-basis point rate hike (instead of 75-basis points) by the Fed in its meeting this week. On the other hand, the Fed decision could be impacted by the US CPI reading which has estimates that are significantly hotter than the estimates for last Friday’s PPI. In retrospect, the US PPI came in hotter than expected and if CPI comes in hotter than expected, those results should be labeled as a sign that inflation lives on. While the trade fully expects the Fed rate hike this week, the presence of rising rates around the globe is certainly a limiting force for gold and silver. Perhaps the gold market is sensing improved demand from India after November Indian fuel demand posted an 8-month high. However, February gold prices are approaching $1,825 which is near the highest level since early August and that could discourage some Asian buyers.
With the most recent COT positioning report showing palladium retaining a net spec and fund short, a portion of the bounce in prices at the end of last week might have been classic short covering. While the relaxation of Covid activity restrictions in China contributed to last week’s recovery in platinum prices, news that Anglo-American reduced forward production guidance probably added to the rally.
In retrospect, the copper market last week extended the bounce from the late November low off the Chinese relaxation of Covid activity restrictions. Unfortunately for the bull camp, it appears that Chinese infections are surging because of the reduced activity restrictions and that could call Chinese copper demand and last week’s gains into question. Furthermore, the US Federal Reserve is very likely to raise interest rates thereby casting some doubt on a dramatic improvement in the US and global economies.
While major oil ETF instruments on both sides of the Atlantic have seen inflows (Wisdom Tree Brent ETF +450 million, United States Oil Fund +169 million), we see that money attempting to pick a bottom without sufficient evidence. Apparently, the trade is unconcerned about Putin’s threat to cut oil flows in response to the price cap with crude oil prices remaining just above last week’s spike low. Evidence of the markets ongoing bearish bias is press coverage Monday morning suggesting the opening of China is likely to result in a reduction in demand because of an explosion of infections. While some economists suggest a price reaction to the implementation of the price cap could still surface, last week’s sharp declines in the face of the implementation suggest the latest sanction is a nonevent.
Unlike the crude oil market, the gasoline market has forged a lower low breakout early today with that weakness partially the result of confirmation of a 70,000-barrel week over week increase in loadings of clean fuels from Asia destined to the Americas. In a headline that confirms the market’s suspicions from last week, the trade expects US diesel stocks to begin to normalize because of slowing in the US.
The soybean market experienced follow-through selling from Friday’s reversal as some rain in Argentina and China demand concerns helped to spark selling. A sharp drop in Malaysia palm added to the negative tone but the Argentina weather outlook is still mostly dry with higher than normal temperatures. March Soybeans closed lower on Friday after first trading up to the highest level since September 13th. US soybean ending stocks for 2022/23 came in at 220 million bushels versus an average expectation of 233 million and a range of expectations from 200 to 296 million. This was unchanged from the November report.
March corn closed slightly higher on the session last Friday, but still down for the week. US corn ending stocks for 2022/23 came in at 1.257 billion bushels versus an average trade expectation of 1.238 billion and a range of expectations from 1.170 to 1.350 billion. This was up from 1.182 billion in the November report. Exports were revised down by 75 million bushels. World ending stocks came in at 298.40 million tonnes versus an average expectation of 301.00 million (range 298.00-304.00 million) and 300.80 million in November. Brazil’s production for 2022/23 was unchanged at 126.00 million tonnes versus 126.30 million expected. Argentina’s production was also unchanged at 55.00 million tonnes versus 53.80 million expected. The USDA cut Ukraine’s 2022 corn harvest to just 27 million tonnes, down from November outlook for 31.5 million.
The wheat market remains in a steady downtrend and while the market is extremely oversold, there is still no sign of a low. March Wheat closed moderately lower on the session Friday after the USDA Supply/Demand update, and this left the market with a loss of 26 3/4 cents for the week. US 2022/23 wheat ending stocks came in at 571 million bushels versus an average expectation of 581 million (range 551 to 602 million) and unchanged from the November report. World ending stocks came in at 267.33 million tonnes versus 268.0 million expected (range 262.5-276.0 million) and 267.82 million in November.
February hogs closed lower on Friday with an inside day and the market was down 640 (down 7%) for the week. Choppy trade has been seen in the pork product market last week and this helped spark the bounce off the lows Thursday. The USDA pork cutout, released after the close Friday, came in at $85.79, up $1.84 from Thursday but down from $87.64 the previous week. The four-day break last week leaves the market slightly oversold but there is no technical sign of a short-term low. The market is probing for some type of seasonal low, but demand appears sluggish, and supply is still high. The USDA estimated hog slaughter came in at 484,000 head Friday and 140,000 head for Saturday. This brought the total for last week to 2.572 million head, down from 2.590 million the previous week and down from 2.656 million a year ago.
The cattle market continues to carry a bullish tilt from a supply perspective. February cattle closed sharply higher on the session Friday after a slightly higher opening, and this left the market 32 lower for the week. Continued talk that supply will tighten in the weeks ahead has helped to support. In addition, February cattle traded down to a discount to the cash market last week, and this may have slowed the selling, and encouraged new buying. In the USDA update, 2022 production was revised higher and so were exports for this year and next. The USDA boxed beef cutout was up 66 cents at mid-session Friday and closed $1.65 higher at $248.93. This was down from $249.93 the previous week. Cash live cattle trade was active on Friday, with 14,466 head reported in the five regions. As of Friday afternoon, the five-day, five-area weighted average price was 155.57, down from 156.46 the previous week.
Cocoa’s turnaround last Friday was due to a negative shift in global risk sentiment and gained additional strength from profit-taking in front of this week’s critical events. While the market may have trouble finding its footing, recent bullish supply development can help cocoa prices to hold their ground above their 200-day moving average. March cocoa found early strength and reached a 4-week high before turning sharply to the downside as it finished last Friday with a sizable loss and a negative daily reversal. For the week, March cocoa finished with a loss of 32 points (down 1.3%) which broke a 2-week winning streak and was a negative weekly reversal.
A significant portion of global coffee consumption occurs at restaurants and retail shops where demand is more sensitive to higher inflation. While coffee prices have had a rough start to December and have critical longer-term inflation forecasts to digest this week, there have been bullish supply developments that can help the market find its footing. March coffee could not build on early strength as it fell to a 2 1/2 week low before finishing Friday’s trading session with a modest loss and a third negative daily result in a row. For the week, March coffee finished with a loss of 4.45 cents (down 2.7%) which was a second negative weekly result in a row.
March cotton managed to close slightly higher on session Friday but down on the week. In Friday’s monthly supply/demand update, the USDA raised the US 2022/23 cotton yield estimate to 868 pounds per acre from 855 in the November report. This brought the production forecast to 14.24 million bales from 14.03 million previously but still down from 17.52 million a year ago. US exports were lowered by 0.25 million bales to 12.25 million, and domestic usage was lowered by 0.10 million to 2.20 million. US ending stocks increased to 3.50 million bales from 3.00 million previously but down from 3.75 million in 2021/22 and the second lowest since 2016/17. The stocks/usage ratio increased to 24.2% from the November estimate of 20.3% and the highest since 2019/20.
Sugar prices benefited from near-term bullish supply developments late last week but remain firmly within its December consolidation zone. Unless it can find fresh carryover support from key outside markets, sugar remains vulnerable to a sizable pullback this week. March sugar rebounded from early pressure and rallied through midsession, only to turn back to the downside late in the day as it finished Friday’s trading session with a mild loss. For the week, however, March sugar finished with a gain of 12 ticks (up 0.6%) which was a second positive weekly result in a row.
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