While US treasuries technically closed higher and built consolidation support on the charts last Friday, we see the totality of recent US economic news markedly shifting views on the prospect of a first quarter US rate cut. In fact, we discounted the slightly hotter than expected US CPI, embrace the slightly softer than expected PPI reading and we see the economy holding steady instead of faltering. Therefore, the downtrend from the late December highs is likely to resume next week.
Given the US economic news since the start of this year, the bull camp in the dollar should be extremely inflated. In addition to a stronger-than-expected US nonfarm payroll reading last week, US initial claims remain near downside breakout levels on their charts and inflation readings still favor a declining pattern of prices. However, the dollar clearly lost the upside momentum pattern from the end of December through early January rally and has faltered despite falling prospects of a first quarter US interest rate cut.
With the equity markets managing to hold up in the face of a slightly disappointing hotter than expected US CPI report, the bull camp was heartened. However, a softer than expected US PPI report did not spark a definitive rally suggesting the bull camp might be growing sensitive to high stock prices. In fact, with Friday being the most active day of the current earnings cycle providing negative news toward banks, the equity markets could have corrected a large portion of last week’s low to high rally in the S&P of 112 points.
GOLD, SILVER & PLATINUM:
In addition to gapping higher early this week, the dollar index reached the highest price level since December 13th in a reaction that appears to carry follow-through potential. Adding into the bearish track for gold and silver to start the new trading week, US treasury yields are climbing and gold ETF holdings at the end of last week had posted nine straight days of outflows, with holdings last week reduced by 656,635 ounces. Year-to-date gold ETF holdings are already down 1.2% while silver ETF holdings are down only 0.6% year to date.
While the copper market did not post a lower low early this week, the charts remain definitively bearish with the lower high and lower low pattern likely to extend straightaway. Despite higher Chinese equity market action, a risk off mood exists in Southeast Asia and in most of the world, leaving copper demand concerns from last week in place. However, the copper market should see support from news that a major Chinese bank has listed 41 developers who have been authorized for funding support, as that provides minimal solace for the property sector. However, with the largest Chinese private property developer indicating the property markets in China will remain weak and could face “severe challenges”, assistance to Chinese property developers probably indicates the Chinese property sector remains on the ropes!
The energy markets remain caught in fundamental and technical ranges with the trade facing a measure of big picture bearish news from a strengthening dollar, an uptick in global interest rates, a large projected increase in 2024 oil exports from the Caspian Pipeline Consortium and from signs of softening Indian diesel demand. However, prices should be supported in the short-term by a 14% week over week decline in global crude oil in floating storage and from last week’s news that Chinese 2023 crude oil imports posted a record of 11.28 million barrels per day or a gain of +11%.
On the other hand, concerns of shipping through the Red Sea has resulted in inventory backing up and in turn creating tightness in certain arrival destinations. It should also be noted that signs of increased bullish speculative interest have been noted in London with Brent $120 calls seeing increased trading volume and Brent crude oil implied volatility jumping sharply. In a minimally supportive development, there are reports that certain US oil production areas are already suffering reduced output due to extreme cold which is expected to maintain through this week.
The USDA reinforced the ideas of adequate US stocks last Friday with an increase in US ending stocks of 35 million bushels from last month and a stocks to use ratio at a 4 year high. Trader participation surged last Friday with March futures having its highest volume day since it began trading back in late 2021. Prices closed well off the lows of the day, and combined with the high volume, a possible capitulation low can’t be ruled out.
The USDA did the corn market no favors on Friday as nearly all the numbers were bearish. A surprising 2.4 bushel increase in yield could not be offset by a decrease in harvested acres. Adding further to the bearish stats, the USDA chose to adopt China’s government corn stocks statistics for this report which raised China stocks 13 million tonnes, in turn raising world carryout by 10 million tonnes. Food/seed, feed/residual and ethanol numbers were all raised but carryout still grew 31 million bushels from last month’s report.
Friday saw the largest trading volume in a little over a month and USDA’s supply demand report offered mostly neutral to slightly friendly numbers. Feed/residual was raised 24 million bushels resulting in ending stocks dropping a like amount from last month. Quarterly stocks were up 8% from a year ago, with on farm stocks up 9%. However, the surprise came in a larger than expected drop in all wheat acreage, down 6% at 34.425 million acres, and down 1.7 million from last season.
February hogs held their uptrend last week, and Thursday’s close above 72.45 changed the medium-term trend to higher. Snow and extreme cold weather in the Midwest hurt weight gain and can back up hogs in the country. This could limit supply in the near term but create a backlog later. The USDA estimated hog slaughter came in at 332,000 head Friday and 149,000 head for Saturday. This brought the total for last week to 2.279 million head, down from 2.371 million the previous week and 2.689 million a year ago.
Wintry weather is slowing slaughter and raising concerns about weight gain, but it is also backing up supply, which could limit gains once the weather improves. There is a mild reprieve expected this week in the Northern Plains, but then it gets cold again. Next week could see a return to above freezing, but this is expected to be accompanied by rain. The USDA estimated cattle slaughter came in at 105,000 head Friday and 20,000 head for Saturday. This brought the total for last week to 549,000 head, down from 551,000 the previous week and 660,740 a year ago.
The cocoa market has been in an uptrend since September 2022, and the strong gains in 2023 left the market vulnerable to profit-taking. Cocoa prices rallied 324 points (+8%) from Monday’s 8-week low through midsession Friday, and it should extend its longer-term uptrend during the first quarter. March cocoa extended last week’s recovery move to a new 46-year high before finishing Friday with a sizable gain. For the week, March cocoa finished with a gain of 119 points (up 2.8%) which was a second positive weekly result in a row and a positive weekly reversal from Monday’s 8-week low.
Over the last ten trading sessions, coffee prices have lost 18 cents in value (down 9%) and have closed below their 50-day moving average for the first time since mid-October. With many of the world’s largest Arabica-growing nations looking at larger production this season, coffee prices may see further downside before they can find their footing. March coffee gave up early gains and fell to a new 4 1/2 week low before finishing Friday’s trading session with a heavy loss. For the week, March coffee finished with a loss of 2.80 cents (down 1.5%) which was a third negative weekly result in a row.
The cotton market saw a brief rally on bullish US numbers in Friday’s USDA monthly supply/demand report but quickly gave up those gains when the world number came in bearish. A revision lower for 2023/24 global consumption was particularly concerning to the bulls, as the US exports face stiff competition from Brazil and Australia, and it seems that only a boost in global demand will lift the market out of its 2 1/2 month trading range.
March sugar saw daily highs within a tight 0.05 range (21.91 to 21.96) over the past four sessions, which may set the market up for a near-term pullback. With the Brazilian supply outlook starting to take a positive shift, however, sugar prices should remain well supported early this week. March sugar held within a relatively tight early range before coming under late pressure as it finished Friday’s trading session with a moderate loss. For the week, however, March sugar finished with a gain of 0.50 (up 2.4%) and a second weekly gain in a row.
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