On one hand, last Friday’s US job related data was mixed but it could be argued the readings depicted an economy standing up to the rate hike cycle. However, seeing stronger than expected average hourly earnings probably concerns the Fed while the Fed sees less risk of further tightening because of the overall condition of the US job sector. On the other hand, if one interprets last Friday’s jobs news as positive, the magnitude of the downside action in bonds and notes was undersized and indicative of a lack of bearish resolve.
Despite attempts to recover, the dollar index ultimately posted a fresh new low for the move and preferred the lower end of the trading range for most of last Friday’s trading session. In other words, a better-than-expected nonfarm payroll reading and concerning wage readings were almost totally discounted by the currency markets. However, one could make the argument that the US economy continues to hold up in a fashion that justifies flight to quality money exiting the dollar. While the dollar index has displayed respect for the 104.00 level early this week, the fundamental path of least resistance remains down as the potential reopening of China offsets expanding fear of a recession in Europe.
In fact, the Chinese currency has jumped and has reached the highest levels since mid-September which is a fresh undermine of the US dollar. Despite broadening recession forecasts for Europe, the euro has forged a higher high for the move and the highest trade since the end of June! Even though the Yen has not forged a fresh higher high for the move early today the currency is likely to respect support at Friday’s low. As in other nondollar currencies at the start of this week, the Pound has forged a fresh higher high in the face of disappointing scheduled data.
As expected, the stock markets exhibited significant volatility early last Friday because of the non-farm payrolls report. In fact, given the better-than-expected payroll reading and concerns of wage inflation, treasury could have jumped and in turn could have sparked selling in equities off a slight rekindling of fears of a 75-basis point Fed funds rate later this month. Global equity at the start of this week were mixed with gains posted in Asia from Chinese covid news, but that positive news was offset by losses in Europe off recession fears.
Corporate news for the NASDAQ at the start of the week was mixed with Tesla reporting a 20% reduction in Model-Y output by its Shanghai plant and Twitter shares benefiting from news that both Apple and Amazon would resume advertising on the social media site.
GOLD, SILVER & PLATINUM:
With the dollar showing signs of stabilizing above 104.00 at the start of this week and interest rates tilting higher, a portion of the anticipated lift from news that China may relax Covid restrictions (in its two largest cities) was lost on gold and silver. However, seeing China relax restrictions should support physical commodities worldwide. Fortunately for the bull camp, the net spec and fund long in gold is in the lower 10% of the net spec and fund long positioning since March, but this week’s reading likely dramatically understates the adjusted net spec and fund long present into the high early this week.
With the very aggressive 4-day rally in March silver last week of $2.47, the net spec and fund long in silver is likely dramatically understated in the COT report. Despite the recent sharp gains in gold, silver, and platinum, the palladium market remains listless and seemingly without a key fundamental focus.
Obviously, the platinum market is the leadership market in the PGM complex with the trade seemingly embracing improving auto catalyst demand views and retaining a small premium for the prospect of disrupted Russian PGM supplies.
In retrospect, the magnitude of this week’s early gain in copper is disappointing when compared to last week’s gains that were forged in the face of rumors of a loosening of Chinese activity restrictions. However, copper prices into the high early Monday morning have rallied $0.35 from the late November low in a sign that the market has been anticipating a moderation of Chinese Covid rules. With the net spec and fund positioning in copper recently shifting from net spec and fund short to a net spec and fund long, and the copper market from the COT report mark off gaining $0.22 (into the high on Friday) the copper market is potentially the most overbought since April.
Clearly, additional chatter that China will continue to relax Covid restrictions offsets growing recession fears in Europe. As indicated by CNBC at the start of this week, traders should not underestimate the bounce in global energy demand with the reopening of Chinese cities. According to some CNBC dialogue, a full reopening of China could add 2.1 million barrels of daily demand for crude oil. However, Chinese government policy has been shifting back and forth and reduced Covid restrictions in the past have been less beneficial than initial expectations. However, given the precipitous decline in the US dollar, traders expected to see crude oil prices perform better in the last 2 trading sessions last week.
We continue to see the gasoline market as the most vulnerable fundamental and technical component of the petroleum complex. In fact, both crude and ULSD have tighter relative supplies and relatively stronger demand prospects than RBOB. While we think the diesel market has better fundamentals than gasoline, the charts turned negative last week and the US refinery operating rate of 95.2 should bring an increase in ULSD supply to the market potentially matching rising seasonal demand.
January soybeans remain in a steady uptrend and if the weather does not improve quickly in Argentina, the market is likely to build a weather premium. The proposed EPA biofuel volume for the next three years will be subject to debate and won’t be finalized until June. Fund traders expected a continued acceleration of soybean oil used for biofuel in the next three years but the EPA proposal shows an increase of only 2.2% in the biofuel mandate from the 2022 target. On top of the EPA news, the record premium of soybean oil above palm oil plus news of high soybean oil stocks in Argentina were factors which helped to pressure soybean oil. This has hurt soybean oil demand globally and has helped support much stronger palm oil demand. As a result, news of a sharp break in palm oil prices last week was additional bearish news for the soybean oil collapse. Also, canola oil from Canada has now been approved as a biofuel feedstock for the renewable fuel standard, which might spark additional imports from Canada. Stats Canada pegged the Canola crop at 18.2 million tonnes, down by 925,000 tonnes from the previous estimate.
A combination of weaker export demand and disappointment over the proposed biofuel mandates helped to drive the market lower last Friday. The Biden Administration proposed boosting the amount of biofuel that must be mixed into gasoline and diesel over the next three years, but the targets were below market expectations. March corn closed sharply lower on the session Friday and the selling pushed the market down to the lowest level since August 23. The export tone remains very weak and this has left the market in a long liquidation selling mode. Statistics Canada reported their corn crop at 14.5 million tonnes, up 4% from last year.
March wheat closed sharply lower on the session last Friday and even took out the August lows. This leaves a longer-term swing target near 683 1/4. Continued concerns with a very poor export market helped to pressure. A record crop from Russia and a lack of positive news helped keep fund traders as active sellers. Statistics Canada indicated that the country produced its third biggest wheat crop ever with production coming in at 33.8 million tonnes, down from the September estimate of 34.7 million tonnes but up 52% from last year. Trade expectations were for a crop near 34.8 million tonnes.
February hogs closed sharply higher on the session Friday after the early break failed to attract new selling. The buying pushed the market up to the highest level since November 22. The USDA pork cutout released after the close Friday came in at $87.64, up $2.94 from Thursday and up from $86.88 the previous week. The market managed to rally sharply off of the lows last week even with high slaughter levels. Ideas that pork production is about to peak for the next year helped to support. The USDA estimated hog slaughter came in at 486,000 head Friday and 138,000 head for Saturday. This brought the total for last week to 2.590 million head, up from 2.213 million the previous week but down from 2.656 million a year ago.
February cattle closed higher on the session last Friday and experienced the highest close since November 22nd. The outlook for a steep drop in beef production into the first and second quarters of next year helped to support. The USDA boxed beef cutout was down $2.02 at mid-session Friday and closed $3.64 lower at $249.93. This was down from $251.83 the previous week and was the lowest it had been since October 17. Cash live cattle ended last week slightly higher than the week before. As of Friday afternoon, the five-day, five-area weighted average price was 156.35 versus 156.12 the week before. The USDA estimated cattle slaughter came in at 123,000 head Friday and 28,000 head for Saturday. This brought the total for last week to 663,000 head, up from 596,000 the previous week but down from 682,000 a year ago.
High retail inflation can force consumers to pull back on purchases of discretionary items like chocolate. However, the recent declines in year-over-year inflation in the US and the Euro zone should give a boost to chocolate demand in both regions and should underpin cocoa prices going forward. March cocoa was able to rebound from early pressure and retested Thursday’s high before finishing Friday’s trading session with a moderate gain. For the week, March cocoa finished with a gain of 52 points (up 2.1%) which was a second positive weekly result in a row.
Fed Chair Powell’s speech last Wednesday may be an early indicator of improving coffee demand, as his suggestion that the Fed may pull back on the size of upcoming rate hikes may be due to a pullback in inflation that should benefit restaurant and retail shop demand prospects. With the market already benefiting from a bullish longer-term supply outlook, coffee prices should stay well clear of their mid-November lows. March coffee saw downside follow-through from Thursday’s wide-sweeping outside-day down close, but held above Monday’s weekly low before finishing Friday’s trading session with a moderate loss. For the week, March coffee finished with a loss of 2.45 cents (down 1.5%) which was third negative weekly result over the past 4 weeks and was a negative weekly reversal from last Thursday’s 4-week high.
The surge higher in the China stock market at the start of this week is a positive force. March cotton closed sharply lower on Friday after trading to its highest level in two weeks on Thursday. The stock market broke early in the session after the US jobs report came in higher than expected on fears that this would encourage the US Fed to stay the course on tightening, and this may have scared cotton longs to liquidate. The dollar was also higher early in last Friday’s session, which was negative for cotton.
Sugar prices remain well below their mid-November highs as they have not received consistent carryover support from key outside markets. With the market looking at a sizable global production surplus this season, sugar remains vulnerable to a sizable downside move this week. March sugar could not hold onto mild early gains as it came under pressure and finished Friday’s trading session with a moderate loss. For the week, March sugar finished with a gain of 15 ticks (up 0.8%) which was fourth positive weekly result over the past 5 week and was a positive weekly reversal last from Monday’s 3 1/2 week low.
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