Bobby Coats and Bert Greenwalt attend Ag council of Arkansas meeting
Bobby Coats and Bert Greenwalt, agricultural economists with the University of Arkansas and Arkansas State University, catch up at the Agricultural Council of Arkansas annual meeting in Little Rock.

Falling interest rates, U.S. equity firmness, commodity index weakness in headlines

Commodity Index has become dangerously weak, and growers should not rule out an additional leg down given sluggish global growth and other factors.

What to expect from the markets this week, June 5, 2017

Market “Near Term” Snap Shot

  • 10-year Treasury Yield: Remains bullish – lower interest rate with more weakness than strength
  • S&P 500: Caution – Global investment demand remains supportive of prices, technology component of index presently supporting price strength, longer term trend remains up
  • Global Equities: Some consolidating gains; others near term bullish; any significant corrective activity in the S&P 500 will spill-over into many global equity markets (see slide show for individual countries)
  • U.S. Dollar: Remains Bearish - More weakness than strength; normally a positive for commodities, but presently not so much with supply mostly outpacing demand and renewed concerns of global economic uncertainties
  • Oil $WTIC: More weakness than strength; expect price volatility due to fundamentals, soft inflationary pressures, and uncertain fiscal, monetary, trade and regulatory policy weighing heavy on this market
  • Commodity Index: Dangerously weak, do not rule out an additional leg down given sluggish global growth, geopolitical challenges, overall commodity supply exceeding demand
  • Corn and Wheat: Basing Continues – Commodity sector weakness near term problematic
  • Soybeans: Soybeans are in search of a bottom at $9.06 or possibly the $8.35 area   
  • Rice: Slight bullish bias remains due to U.S. long grain 2017 acreage and production uncertainty, but slowly losing momentum 
  • Cotton: With the 84-cent-plus price objective achieved now we wait on price action to determine if additional price strength exists.

Inflationary Forces Waning

Stimulative reflation and rising interest rates retreat causing investors to seek safe-haven investment opportunities. Turning bonds bullish and supporting many U.S. and global equity markets, see accompanying slide show. The commodity sector for the most part weakened this past week, as domestic and global economic weakness concerns continued to rise.

On May 30, 2017 Federal Reserve Board Governor Lael Brainard raised concerns about “lagging growth and weakening inflation numbers” in a speech Navigating the Different Signals from Inflation and Unemployment, at the New York Association for Business Economics, New York, New York.

Lael Brainard closed her speech by saying, “I will be watching carefully for any signs that progress toward our inflation objective is slowing. With a low neutral real rate, achieving our symmetric inflation target is more important than ever in order to preserve some room for conventional policy to buffer adverse developments in the economy. If the soft inflation data persist, that would be concerning and, ultimately, could lead me to reassess the appropriate path of policy.” Speech Link: https://www.federalreserve.gov/newsevents/speech/brainard20170530a.htm

Bloomberg: Fed's Brainard Says Soft Inflation May Warrant Rate Rethink, by Jeanna Smialek and Matthew Boesler, May 30, 2017

“Federal Reserve Governor Lael Brainard said soft inflation could cause her to reassess the path forward for monetary policy should it linger, even as the global economic outlook brightens and U.S. growth looks poised to rebound.

“If the soft inflation data persist, that would be concerning and, ultimately, could lead me to reassess the appropriate path of policy,” Brainard said in prepared remarks Tuesday. She said her baseline expectation is that “it likely will be appropriate soon to adjust the federal funds rate” and start shrinking the balance sheet.

Brainard’s remarks underline a puzzle facing the U.S. central bank. Joblessness has fallen to a post-crisis low and consumer confidence is strong, yet price pressures have cooled, which could make the Fed’s coming discussions more complicated. Policy makers lifted rates in March and have penciled in two more 2017 rate increases, and investors expect the first of those to come in June.”

Continue reading at

https://www.bloomberg.com/news/articles/2017-05-30/fed-s-brainard-says-soft-inflation-may-call-for-rethink-on-rates

In addition to the following “Expanded near Term Market Considerations Week Beginning June 5, 2017”

Download Slide Show for charts and expanded details at the download link.

This Week’s Select Summary Considerations:

  • 10-Year US Treasury Yield:
    • We enter the week bullish with a potentially lower yield
    • Economic Weakness, Event Risk Concerns, or Other Market Concerns/Factors will likely take yields lower to 2 or below before moving higher
    • As global events unfold (economic, social, political, etc.) chart activity will provide guidance
  • US Dollar Index:
    • Remains Bearish: For a period the dollar should have more weakness than strength especially against the Euro
    • Big Picture: The dollar has a bullish bias given global economic, social, political and military challenges
    • Unless Middle East, North Korean, European, other anomaly events start to dominate market participant decisions for a period, then we are still DEFINING a trading range 95 -104
  • CRB Index:
    • Global economic uncertainties have this index dangerous weak, an additional leg down should be expected before bottom is in place
    • Between Fed off-again and on-again accommodation and/or verbal guidance, building uncertainties surrounding fiscal, trade and regulatory policy simulative activities, the $CRB Commodity Index a key economic indicator has struggled
    • Bigger Picture: Though spastic global macro forces in general remain supportive of the commodity sector
  • $WTIC Light Crude Oil:
    • Near-term prices remain in 45 to 55 dollar trading range
    • Additional price weakness will likely be problematic for the $CRB Index and commodity sector
    • Sustained oil prices below $50 presents macro challenges and raises global economic momentum concerns
    • 2017 – Likely primary range $40 to $60 with possible high in $72 area
  • Soybeans:
    • In search of a bottom at $9.06 or possibly $8.35
    • A resumption of commodity index weakness, a likely function of fundamentals and Fiscal and Monetary Policy and Global Economic Uncertainties, could translate into a final price low at $8.35 or lower
    • Simply stated watch the price action to define soybean price dynamics
  • Corn:
    • Basing period underway followed by upward price momentum
    • Cautionary Note: A resumption of oil price weakness could possibly be problematic for corn prices
  • Long Grain Rice:
    • Slight bullish bias remains due to U.S. long grain 2017 acreage and production uncertainty, but slowly losing momentum
    • This is a highly complex market with an array of factors impacting price from 2016/2017 fundamentals; 2017 acreage, production and quality uncertainties; present underlying aggregate commodity sector dynamics; problematic global economic momentum, geopolitical uncertainties, and/or global agronomic outlook
  • Cotton:
    • With the 84-cent price objective achieved now we wait on price action to determine if additional price strength exists
  • Wheat:
    • Global economic uncertainties weigh heavy on this market, but price potential to $4.71 to $5.51 remains a possibility
  • SPY SPDR S&P 500 ETF:
    • Cautionary period
    • Allow price action to unfold
    • Larger trend remains up
  • QQQ NASDAQ Power Shares:
    • Momentum driven by a select few technology stocks
    • Allow price action to unfold
    • Larger trend remains up
  • EFA iShares ETF - Global Equities Excluding U.S. and Canada:
    • Trend remains up
  • EEM iShares ETF, Emerging Market Equities:
    • Entering a cautionary period
    • Trend remains up
  1. Bobby Coats is a professor in the Department of Agricultural Economics and Agribusiness, Division of Agriculture, University of Arkansas System. E-mail: [email protected]

DISCLAIMER-FOR-EDUCATIONAL-PURPOSES

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