Row of round cotton modules shows production of Arkansas field
Dozens of round modules grace the edge of a cotton field near Portland, Ark., in 2016.

Fed tightening could have impact on commodity markets

This is an important week for cotton. Prices need to hold the 68-cent area or, otherwise, consideration has to be given to revisiting the 2016 low of around 55-cents.

What to expect from the markets this week, June 19, 2017

Market “Near Term” Snap Shot (To see this week’s slides, click on download button at the bottom of this article.

  • 10-year Treasury Yield: Remains Bullish: We enter the week with the 10-Year US Treasury Yield slightly bullish with a potentially lower yield (trend presently remains bullish or lower yield)
  • S&P 500: Near term cautiously bullish  
  • Global Equities: Near term cautiously bullish
  • U.S. Dollar: Remains Bearish: For a period the dollar should have more weakness than strength. This week the dollar may correct some of the downside move  
  • Oil $WTIC: Remains Bearish: Fundamentals and other factors now suggest consideration of a significant price move below $40
  • Commodity Index: Global economic uncertainties and bearish energy fundamentals has this index dangerously weak, an additional leg down should be expected before bottom is in place 
  • Corn: Near term upside $4.55
  • Wheat: Price potential to $5.51 remains a possibility
  • Soybeans: Cautiously bullish   
  • Rice: Bullish bias remains
  • Cotton: This is an important week for cotton. Prices need to hold the 68-cent area or otherwise consideration has to be given to revisiting the 2016 low around 55-cents

Fed Very Serious About Tightening

During the Federal Reserve Chair Janet Yellen’s press conference on June 14, following the Federal Reserve’s Open Market Committee meeting, two key points were made in her opening comments.:

First, the Federal Open Market Committee raised the target range for the federal funds rate by .25 percentage point to 1 to 1.25 percent.

Second, the committee released additional information on the process that they will follow in normalizing the size of their balance sheet. Once the Fed starts normalizing their balance sheet, expect longer duration loan interest rates to rise.

The Fed’s economic justification

Economic growth appears to have rebounded from the slowdown experienced in the first quarter.

Household spending appears to now be supported by solid fundamentals with ongoing improvement in the job market and elevated levels of consumer sentiment and wealth.

Last year’s weak business investment, is now expanding.

2017 exports are showing improved strength in 2017 which is a function of an expansion of global growth, due, in large part, to extremely accommodative global Central Bank policies.

Rate Hike What You Need to Know

Short of just monetizing future debt the Fed desperately needs to raise rates in preparation for the next economic U.S. downturn or the next U.S. recession, which could be sooner rather than later.

The Fed raised the Fed Funds Rate by .25-percent and indicated their intention to raise rates one more time this year (likely December) and three more times next year. This is totally data dependent. Of the potential next four rate increases the December rate increase is most likely. 

Without what many refer to as the Trump Rally or the anticipation of expanding fiscal, trade and regulatory policy and other global policy simulative activities which energized U.S. and many global equity markets post November 2016 U.S. elections the Fed would have been limited in their ability to tighten or raise rates this time. 

The present impact of the rate increase on the U.S. Treasury Yield is to compress the yield curve by raising, for example, the two-year yield while the 10-year yield continues to weaken with lower yields or interest rates. Stated differently the short end of the yield curve is rising and the long-end is falling. The reason the long end of the yield curve or, for example, the 10-year Treasury Yield is falling, in part, is due to declining inflation expectations and foreign demand remains strong for this product. Assuming the Fed reaches the point of starting the process of normalizing their balance sheet, then the long end of the yield curve should start rising.

What will raise the long end of the curve?

The Fed gave a blue print for slowly unwinding their balance sheet, which is another form of tightening.

Assuming the Fed reaches the point of starting the process of normalizing (shrinking) their balance sheet then the long end of the yield curve should start rising as the Fed removes liquidity from the market. This suggests all who have longer term debt should reconsider the merits of refinancing.

Two out of four major Global Central Banks are tightening, the U.S. Federal Reserve and the Bank of China. The European Central Bank and the Bank of Japan are still highly accommodative and manage aggressive Quantitative Easing Programs.

Market participants have building global growth expectations in the second half of the year. The question becomes is the growth sustainable without major complimentary fiscal, trade and regulatory policy simulative intervention by Global Governments and Central Banks.         

Bloomberg 2 Minute Video by Brian Kartagener: Fed Chair Janet Yellen's Press Conference in Two Minutes, June 14, 2017

Federal Reserve officials forged ahead with an interest-rate increase, raising the benchmark lending rate for a third time in six months. Fed Chair Janet Yellen held a press conference after the decision. Here are the highlights.

The Fed Chair said the median projection for the federal funds rate is 1.4 percent at the end of 2017 year, 2.1 percent at the end of 2018, and 2.9 percent at the end of 2019. 

“As always, the economic outlook is highly uncertain, and participants will adjust their assessments of the appropriate path for the federal funds rate in response to changes to their economic outlooks and views of the risks to their outlooks. As I’ve noted previously, policy is not on a pre-set course.”

FOMC issues addendum to the Policy Normalization Principles and Plans, Monetary Policy, 06/14/2017

Federal Reserve Board and Federal Open Market Committee release economic projections from the June 13-14 FOMC meeting, Monetary Policy, 6/14/2017

Federal Reserve issues FOMC statement, Monetary Policy, 6/14/2017

In addition to the following “Expanded near Term Market Considerations Week Beginning June 19, 2017”

  • Click the download button at the close of this article to review this week’s slide Show for charts and expanded details.

This Week’s Select Summary Considerations:

 

  • 10-Year US Treasury Yield:
    • We enter the week with the 10 Year US Treasury Yield slightly bullish with a potentially lower yield (trend presently remains bullish or lower yield)
    • Demand, Economic Weakness, Event Risk Concerns, or Other Market Concerns/Factors will likely take yields lower to 2 or below before significant move higher
    • Near term the yield curve is flatting
  • US Dollar Index:
    • Remains Bearish: For a period the dollar should have more weakness than strength. This week the dollar may correct some of the downside move.
    • 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 and bearish energy fundamentals has this index dangerously weak, an additional leg down should be expected before bottom is in place
    • Between Fed off-again and on-again accommodation and/or misdirection 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 and growth forces in general remain supportive of the commodity sector
  • WTIC Light Crude Oil:
    • Fundamentals are finally overriding OPEC verbal guidance and an array of other factors
    • Fundamentals and other factors now suggest consideration of a significant price move below $40
    • Additional price weakness will likely be problematic for the $CRB Index, the commodity sector, the Feds achievement of a 2% inflation goal
  • Soybeans:
    • Cautiously bullish
    • 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:
    • Near term upside $4.55
    • Cautionary Note: Sustained oil price oil price weakness could possibly be problematic for corn prices
  • Long Grain Rice:
    • Bullish bias remains
    • 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:
    • This is an important week for cotton. Prices need to hold the 68-cent area or otherwise consideration has to be given to revisiting the 2016 low around 55-cents
  • Wheat:
    • Price potential to $5.51 remains a possibility
  • SPY SPDR S&P 500 ETF:
    • Near term cautiously bullish
    • Allow price action to unfold
    • Larger trend remains up
  • QQQ NASDAQ Power Shares:
    • Near term cautiously bullish
    • Momentum driven by a select few technology stocks
    • Allow price action to unfold
    • Trend remains up
  • EFA iShares ETF - Global Equities Excluding U.S. and Canada:
    • Entering a cautionary period
    • 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]

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