Running a hot economy could boost global commodity demand, markets

By Dr. Bobby Coats, Division of Agriculture, University of Arkansas System

Market Price Considerations for the Week Beginning Oct. 31, 2016:

Market Anxiety

For the week beginning Oct. 31, 2016, protecting ones’ market positions is paramount for an array of reasons. Two key reasons follow:

  • The U.S. Federal Reserve’s Open Market Committee (FOMC) meeting Tuesday and Wednesday (Nov. 1 and 2) will set the U.S. monetary policy tone for the remainder of the calendar year and into next year. Reading between lines, their verbal guidance will also be highly suggestive of expectations from their global counterparts.
    • Bond Yields Ever-So Slow Rise: No one is really anticipating a rate hike at this meeting, but ongoing global government and Central Bank intervention to address the economic paralyses of chronic global deflationary forces have many global bond yields ever-so very slowly rising. Globally, a slightly stronger economic pulse is evident, due to ongoing global intervention activities, which is no small accomplishment, given the recessionary tendencies of the aggregate global economic setting.
    • Rate Hike Dec. 13-14 FOMC Meeting: Fed verbal guidance have market participants anticipating a rate hike at their December meeting. Very simplistically, one can look at the U.S. and global economy intervention activities one of two ways:
      • First, a continuation of status-quo government and Central Bank intervention likely yields a U.S. economy that slips into a recession sooner rather than later and a global economy that continues to erode its economic activity with the results being building protectionism, chronic slow global growth at the very best and anemic demand for commodities.
      • Second, instead of status-quo, which yields dangerous global economic paralysis, building global populists movements, political uncertainty, military friction or worse, etc. look for continued building simulative activities coming from governments globally that are highly orchestrated with aggressive monetary policy at a level that builds on current policies, which are stabilizing the global economy; with a potentially growing demand for commodities.              
  • Nov. 8, 2016, U.S. Presidential and Congressional elections have market participants scrambling to define their risk exposure and limit their potential loses. At one end of the risk management spectrum some market participants may close positions and at the other end of the spectrum others will simply have an elevated level of risk protection.
    • Whatever the outcome of the elections the fiscal policy challenge will be to provide the U.S. economy with aggressive levels of stimulus sufficient to allow the U.S. to avoid a 2017 recession and provide global fiscal policy leadership sufficient to elevate global economic activity to an inflationary level required to produce real growth and commodity demand.
    • Stimulative fiscal policy activities would be dependent on Presidential and Congressional leadership, but may include infrastructure, a direct check to taxpayers, military preparedness given building global military friction, research to give U.S. businesses a global technological advantage, etc.   

Running a Hot Economy

Yellen Cites Benefits to Running Economy Hot for Some Time

Fed leader also warns that holding an accommodative stance for too long could have costs

By Jon Hilsenrath and David Harrison, Updated Oct. 14, 2016 WSJ

“Federal Reserve Chairwoman Janet Yellen offered an argument for running the U.S. economy hot for a period to ensure moribund growth doesn’t become an entrenched feature of the business landscape.

That would mean letting unemployment fall lower and spurring faster growth to boost consumer spending and business investment.

This could encourage businesses to spend more on new equipment that would have lasting benefits for the economy and encourage future growth, she said. A fast-growing economy and low unemployment also could encourage individuals who have stopped looking for work to start looking again, expanding the labor force and national income.

Moreover, running the economy hot could encourage higher levels of research and development and increase incentives for new business formation.”

Continuing – “Still, her speech at a conference held by the Federal Reserve Bank of Boston offered a window into her mind-set and how policy might evolve in the months ahead. She effectively expressed sympathy for the idea of keeping short-term interest rates low to let the economy gather steam and reverse some of the long-run debilitating effects of the slow recovery, such as low labor-force participation and business investment. That implied very gradual rate increases in the months ahead.

Economic theory holds that weak demand can become a self-perpetuating problem for an economy. When businesses don’t invest and consumers don’t spend, it drives down the productive capacity of the economy and the pool of available labor, begetting still-slower growth. The idea is called hysteresis in economic circles. Weak demand begets weak supply, something Ms. Yellen said—with some careful hedges—might be reversed if demand is boosted.

“If we assume that hysteresis is in fact present to some degree after deep recessions, the natural next question is to ask whether it might be possible to reverse these adverse supply-side effects by temporarily running a ‘high-pressure economy,’ with robust aggregate demand and a tight labor market,” Ms. Yellen said. “One can certainly identify plausible ways in which this might occur.”

A hot economy would boost sales, which in turn would prompt managers to invest more in their businesses, she said. “In addition, a tight labor market might draw in potential workers who would otherwise sit on the sidelines.”

Continue reading at the following link: http://www.wsj.com/articles/yellen-cites-benefits-to-running-economy-hot-for-some-time-1476466215.

Market Considerations – Near Term – Oct. 31, 2016. (See link at bottom of article.)

Charts 1 - 2. $UST10Y - 10-Year US Treasury Yield

Primary Consideration:

  • Higher yields are due the effects and expectations of government and Central Bank intervention and the accompanying market dynamics
  • Yield has a possible upside of 2-plus
  • Global event risks certainty could move yields to 1 - or lower

 

Charts 3 - 4. Soybeans

Primary Consideration:

  • Near term technical price weakness to potentially $8.50 became questionable with last week’s price action. That said, I remain more concerned about additional price weakness and the culmination of a bottoming process

Alternative Consideration:

  • From a technical perspective, considering global risks and uncertainties and required intervention activities argue a price bottom is in place

 

Charts 5 – 6. Corn

Primary Consideration:

  • Near term bottoming process underway with a possible low in the $3.00 per bushel area

Secondary Consideration:

  • Upside considerations presently to $4.19 per bushel

 

Charts 7 - 8. Rice

Primary consideration:

  • A bottoming process is underway

 

Charts 9 -10. Cotton

Primary Consideration:

  • Corrective price action underway with possible price weakness to the bottom of the Bollinger Bands on the weekly chart.
  • Bullish prices likely beyond this corrective price activity 

 

Charts 11 - 12. Wheat

Primary Consideration:

  • Forming a price bottom
  • Price weakness into the $3.80 area a possibility

 

Charts 13 - 14. Copper

Primary Consideration:

  • Copper had a great week last week, but  prices likely need to make a final low before turning bullish

 

Charts 15 - 16. $WTIC

Primary Consideration:

  • A choppy sideways market
  • OPEC, other verbal guidance has interesting impacts
  • Global oil data questionable
  • Daily and weekly charts from last week appear a little bearish going into the week
  • Defining a  trading range
  • Market participants will watch this market closely this week

 

Charts 17 - 18. CRB Index

Primary consideration:

  • Near term bottoming process underway with a final leg down in the index 

Secondary consideration:

  • The bottom is in place

 

Charts 19 - 20. Power Shares US Dollar Index

Primary Considerations:

  • Dollar may need to consolidate its gains with a period of corrective activity, which would be supportive of U.S. exports and commodity prices in general
  • Lately dollar strength has generally been bearish for U.S. exports and commodity prices in general. Global interventionist government and Central Bank activities will define dollar strength or weakness over the next 3 to 12 months

 

Charts 21 – 22. Australian Currency

Primary Consideration:

  • Consolidating
  • Generally a weakening Australian currency implies weakening demand for their commodity based economy
  • Near term I am neutral but longer term my bias is to the upside 

Charts 23 – 24 British Pound Sterling Trust

Primary Consideration:

  • An obvious weak currency
  • BREXIT implied the United Kingdom must retool politically, economically, and socially
  • The currency weakness is a plus for revitalizing their economy

 

Charts 25 - 26. Canadian Dollar

Primary Consideration:

  • Consolidating and churning sideways, due to present global risks and uncertainties
  • Near term bearish indicator for their commodity prices

 

Charts 27 - 28. EURO Trust

Primary Consideration:

  • European Union economic weakness and political and social  uncertainty problematic for EURO, but near term emerging inflationary forces are supportive of EURO and provide DOLLAR relief 

Charts 29 – 30. Japanese Yen Trust

Primary Consideration:

  • Dollar shows strength, while the Yen shows weakness, likely positive for Japanese equities
  • With the DOLLAR likely in a consolidation period be respectful of currency dynamics in general

Charts 31 – 32. SPDR S&P 500 ETF

Primary Consideration:

  • Consolidating, a good week for some corrective price activity, so let price dynamics define price direction
  • Revisiting the bottom Bollinger Band possible

Charts 33 - 34. QQQ NASDAQ Power Shares

Primary Consideration

  • Consolidating
  • Price uncertainty near term, so be respectful until price  direction is further defined

Charts Book Index – Link

Weekly Charts, September 2013 – October 28, 2016

Accompanying Daily Charts

 

Chart 1. $UST10Y - 10-Year US Treasury Yield, Weekly Chart, September 2013 – Oct. 28, 2016

Chart 2. $UST10Y - 10-Year US Treasury Yield, Daily Chart, November 2014 – Oct. 28, 2016

Chart 3. Soybeans, Weekly Chart, September 2013 – Oct. 28, 2016

Chart 4. Soybeans, Daily Chart, May 2016 – Oct. 28, 2016

Chart 5. Corn, Weekly Chart, September 2013 – Oct. 28, 2016

Chart 6. Corn, Daily Chart, May 2016 – Oct. 28, 2016

Chart 7. Rice, Weekly Chart, October 2013 – Oct. 28, 2016

Chart 8. Rice, Daily Chart, February 2016 – Oct. 28, 2016

Chart 9. Cotton, Weekly Chart, September 2013 – Oct. 28, 2016

Chart 10. Cotton, Daily Chart, May 2016 – Oct. 28, 2016

Chart 11. Wheat, Weekly Chart, September 2013 – October 28, 2016

Chart 12. Wheat, Daily Chart, May 2016 – October 28, 2016

Chart 13. Copper, Weekly Chart, September 2013 – Oct. 28, 2016

Chart 14. Copper, Daily Chart, May 2016 – Oct. 28, 2016

Chart 15. $WTIC, Weekly Chart, September 2013 – Oct. 28, 2016

Chart 16. $WTIC, Daily Chart, May 2016 – Oct. 28, 2016

Chart 17. $CRB Reuters/Jefferies CRB Index, Weekly Chart, September 2013 – Oct. 28, 2016

Chart 18. $CRB Reuters/Jefferies CRB Index, Weekly Chart, September 2013 – Oct. 28, 2016

Chart 19. Power Shares US Dollar Index, Weekly Chart, September 2013 – Oct. 28, 2016

Chart 20. Power Shares US Dollar Index, Daily Chart, November 2014 – Oct. 28, 2016

Chart 21. Australian Dollar, Weekly Chart, September 2013 – Oct. 28, 2016

Chart 22. Australian Dollar, Daily Chart, November 2014 – Oct. 28, 2016

Chart 23. British Pound Sterling Trust, Weekly Chart, September 2013 – Oct. 28, 2016

Chart 24. British Pound Sterling Trust, Daily Chart, November 2014 – Oct. 28, 2016

Chart 25. Canadian Dollar, Weekly Chart, September 2013 – Oct. 28, 2016

Chart 26. Canadian Dollar, Daily Chart, November 2014 – Oct. 28, 2016

Chart 27. EURO Trust, Weekly Chart, September 2013 – Oct. 28, 2016

Chart 28. EURO Trust, Weekly Chart, November 2014 – Oct. 28, 2016

Chart 29. Japanese Yen Trust, Weekly Chart, September 2013 – Oct. 28, 2016

Chart 30. Japanese Yen Trust, Daily Chart, November 2014 – Oct. 28, 2016

Chart 31. SPDR S&P 500 ETF, Weekly Chart, September 2013 – Oct. 28, 2016

Chart 32. SPDR S&P 500 ETF, Daily Chart, November 2014 – Oct. 28, 2016

Chart 33. QQQ NASDAQ Power Shares, Weekly Chart, September 2013 – Oct. 28, 2016

Chart 34. QQQ NASDAQ Power Shares, Daily Chart, May 2016 – Oct. 28, 2016

Dr. Bobby Coats is a professor in the Department of Agricultural Economics and Agribusiness, Division of Agriculture, University of Arkansas System. E-mail: [email protected]