The markets are awaiting Federal Reserve Chairman Janet Yellen’s comments after their Federal Open Markets Committee (FOMC) meeting tomorrow (June 15). The question is will Fed monetary guidance be bullish or bearish for rice, cotton, grain and other commodity markets?
I expect guidance to be more supportive allowing market fundamentals a turn at directing commodity price strength or weakness, which near term would be neutral to bearish for commodities having shown price strength and neutral to bullish for commodities just starting to show price strength.
On May 25, U.S. Federal Reserve Chairman Janet Yellen indicated near term future Fed Monetary Policy Activity would likely be increasingly hawkish with all indications of a Feds Fund Rate increase sooner rather than later, possibly as soon as the Fed’s June 14-15 meeting.
This, I expect, was due to building global inflationary forces, being driven by continuous injections of stimulus from fiscal and monetary policy intervention, from the European Union, Japan, China and others. These activities – especially since late-February – have been supportive to bullish for rice, cotton, grains, and oil prices.
Next, the following Friday, June 3rd, after market participants digested the news of the “Lowest Nonfarm Payroll in Over 5 Years,” few market participants now expect a U.S. Fed Fund Rate increase on June 15. The expectation is forward guidance will be:
- First, the FOMC committee remains data dependent; and
- Second, do not rule out a July Fed Funds Rate increase on July 27th.
Presently, the need for a rate increase is huge, but market psychology is lacking.
Thus near term given dollar chart structure I see a dollar more likely sideways channel bound and a potentially bullish environment for U.S. Treasuries.
Impressive unemployment rate, dismal jobs growth
Friday, June 3rd, the Bureau of Labor Statistics released their “Employment Situation for May 2016 Report”.
First, it included a very impressive May unemployment rate of 4.7 percent, a decline of 0.3-percent from the previous estimate.
Second, what many considered dangerous problematic is that May nonfarm payroll employment changed only a positive 38,000, the worst since 2010. The market was expecting a number closer to 155,000.
Lowest Nonfarm Payroll in more than 5 Years
The total nonfarm payroll employment change in May (+38,000) was very unexpected. Consensus was a range of 100,000-plus to 200,000-plus. Health care added 46,000 jobs in May; mining employment continued to decline (-10,000); employment in information declined by 34,000.
Note: About 35,000 workers in the telecommunications industry were on strike and not on company payrolls during the survey reference period. Within manufacturing, employment in durable goods declined by 18,000; employment in professional and business services changed little in May (+10,000), after increasing by 55,000 in April.
Employment in other major industries, including construction, wholesale trade, retail trade, transportation and warehousing, financial activities, leisure and hospitality, and government, changed little over the month.
The average workweek for all employees on private nonfarm payrolls was unchanged at 34.4 hours in May.
On the current state of U.S. employment some see the glass half-empty and others see the glass half-full. The change in total nonfarm payroll employment for March was revised from +208,000 to +186,000, and the change for April was revised from +160,000 to +123,000. With these revisions, employment gains in March and April combined were 59,000 less than previously reported.
Over the past three months, job gains have averaged 116,000 per month. Given the global economic challenges I see the glass as half-full for an array of reasons.
Federal Reserve June 14-15 meeting
Near-term Fed monetary policy guidance appears to be signaling: “do not underestimate our resolve toward increasing the Feds Fund Rate as soon as the July FOMC meeting.”
The Fed, in my opinion, has signaled a need to transition away from global reflation to managing a potential outbreak of global inflation, but market psychology, due to global market dependence on stimulus, presently limits the Fed’s ability to move toward rate normalization by increasing the Fed Funds Rate. Global economic softness is weighing heavy on global growth and limiting the Fed’s options of rate normalization.
Friday’s (June 3rd) employment report took the CME Group 30-Day Fed Fund futures prices, which have long been used to express the market’s views on the likelihood of changes in U.S. monetary policy, to below 2-percent, indicating less than 2-percent, as of June 10th, were expecting a Fed Funds rate increase on June 15th. A rate increase at the July 26-27 FOMC meeting has no more than a 22-percent chance.
On Saturday, June 4th, a day after the jobs report, Bloomberg reported comments of Cleveland Fed President Loretta Mester: “The Federal Reserve should raise interest rates gradually despite weak jobs data.”
U.S. economic growth is picking up, inflation is moving toward target and the country is at full employment, Mester told reporters in Stockholm on that date.
“I still believe that in order to achieve our monetary policy goals a gradual upward pace of the funds rate is appropriate,” said Mester, a 2016 voter on the policy-making Federal Open Market Committee who made the case in April in favor of gradual rate rises this year. “When the rate hikes will occur and the slope of that gradual path is data dependent.” For more on this, visit http://bloom.bg/28crMfD.
Given market psychology just about all market participants expect FOMC board members will see a greater need near term to be dovish than hawkish given today’s global economic setting at their June 14-15 meeting. That said, forward guidance will signal a more hawkish than dovish position for the FOMC July 26-27 meeting.
Being dovish implies the Fed has real concerns surrounding global growth and they remain in an accommodative global reflation posture, which tends to be bullish commodities.
Hawkish guidance implies the Fed is maneuvering to get in front of an issue, like global inflationary concerns, preparing for the next economic downturn, etc.
The U.S. Fed chairman, to paraphrase, believes it is appropriate for the Fed to gradually and cautiously increase their overnight interest rate over time, and probably in the coming months.
Thinking About the future employment numbers today’s U.S. and global economies are changing much faster and in a more dynamic manner than most want to consider.
For the U.S. to be competitive in a global marketplace where the dollar is more likely to be sideways to up rather than sideways to down, then all sectors of the U.S. economy are going to have to embrace technology, consolidate where needed and enhance their business efficiency and this will continue to replace jobs.
So market participants could on the one-hand look at the dismal employment numbers as an economic negative, and on the other hand maybe market participants should look at the dismal job numbers as a market-positive for business profitability.
About the next FOMC July 26-27 meeting the FOMC determines the direction of monetary policy and is composed of the board of governors, which has seven members, and five reserve bank presidents.
I anticipate a number of these committee members will signal a potential hawkish Fed position between now and their July 26-27 meeting.
No action by the Fed at the July 26-27 meeting will likely have an interesting market set-up for the second half of 2016.
Global economic uncertainty is weighing heavy on the Fed’s decision-making process and causing the Fed to remain biased toward global reflation. All things equal this tends to be bullish commodity prices.
I expect Fed guidance to indirectly indicate they support allowing market fundamentals a turn at directing commodity price strength or weakness, which near term would be neutral to bearish for commodities having shown price strength and neutral to bullish for commodities showing price strength.
the Fed there will be no change in the Fed Rate until their September, November or December meeting would likely be more bearish than bullish for the dollar, increase global inflationary forces and all things equal more bullish than bearish for oil, cotton, rice, soybeans, corn, and wheat prices.
The next Macro Article will discuss the June 23rd BREXIT vote. Brexit is an abbreviation of "British exit" and refers to the possibility that Britain will withdraw from the European Union. An exit by the United Kingdom from the European Union, which is becoming increasingly likely, will also be near term fairly price supportive for commodities like rice, cotton, grains, and oil.
Dr. Coats is a professor in the Department of Agricultural Economics and Agribusiness at the Division of Agriculture, University of Arkansas System.