July 12, 2019
- All signs point to a Fed rate cut later this month
- Precious metals remain strong
- Copper and industrial commodities move mostly higher
- Energy prices move higher across the board- Agricultural commodities mostly higher after the July WASDE report
- New highs in stocks and the dollar falls
The story of this week:
A corrective rather than preemptive rate cut
This week we heard from the Chairman of the Federal Reserve as he testified before committees in both the House of Representatives and the Senate. At the June FOMC meeting, the central bank told markets that the Fed Funds rate would likely head lower, which caused the dollar index to stall and gold to break out to the upside above its critical technical resistance level at the 2016 peak. At the June meeting, the Fed told markets that inflation at below its 2% target rate and “crosscurrents” from China and Europe are the reasons for the switch to a dovish approach to monetary policy lower rates on the horizon in the United States.
Meanwhile, the moratorium on any new trade tariffs between the US and China since the June meeting has at least calmed the waters when it comes to the concerns over the Chinese economy. On July 5, the June employment report showed that at 224,000 new jobs, the Us economy is humming along. At the same time, Thursday’s CPI data showed a higher level of inflation than the market had expected while Friday’s PPI came in at the expected level for June. Therefore, the most recent data tells us that the reasons for a rate cut have receded since the June meeting. However, Chairman Powell likely backed the Fed into a corner with his testimony last week as he did not back down from his assertion that the Fed Funds rate is heading lower.
Many analysts are calling the potential for a rate cut “preemptive,” but the truth is that it is more likely that it is corrective. The Fed appears to be admitting that it went too far in 2018 when it hiked the Fed Funds rate by a total of one full percentage point.
The US central bank hiked rates during a time when other central banks around the world continued on a highly accommodative path. Therefore, the likelihood of a Fed Funds rate at the 1.75-2.00% level by the end of 2019 is high, and it could even fall as low as twenty-five basis points lower if economic data weakens over the coming months.
At the same time, balance sheet normalization will end in September, which will take upward pressure off rates further out along the yield curve. Lower rates will likely lead to a weaker US dollar, and a fifty -basis point rate cut could push the dollar index through its technical support level at the mid-March low at 95.17 breaking the pattern of higher lows that has been in place since February 2018. Lower US rates and a weakening dollar could create a potent bullish cocktail for commodities prices over the coming weeks and months. At over $1410 per ounce on Friday, July 12, gold is already telling us that the path of least resistance for many raw material prices is turning higher. Since gold has been rallying in all currencies, the trend is not just a dollar-based event. The bottom line is that central bank policies continue to devalue the world’s foreign exchange instruments and the Fed was running too far ahead of the pack when it came to tightening credit. I view the Fed’s pivot as corrective rather than preemptive, which means that rates are going lower regardless of the recent economic data and commodities prices will head higher.
Highlights in commodities:
- Gold rises 0.86% on the week as the price remains above $1400 per ounce
- September silver recovers by 2.13%
- Platinum rebounds 2.86% since last week. October platinum was at a $577.60 per ounce discount to August gold futures, which narrowed slightly since last week
- Palladium declines 1.39% for the week after the price rises to a marginal new high at $1600.50 per ounce
- September copper rose 1.24% on the week
- September iron ore futures move 4.82% higher as the primary ingredient in steel continues to make higher highs
- The BDI gains 6.82% since July 5 on seasonal factors
- Rotterdam coal moves 1.10% higher since last week
- September lumber falls 9.2% as the price moves below the $350 per 1,000 board feet level
- August NYMEX crude oil moves 4.69% higher since July 5 as inventories decline. The API and EIA reported bullish inventory data again over the past week as the market continues to remain concerned about the Middle East
- September Brent crude oil rises 4.10% since the previous report. September Brent was at $66.82 per barrel on Friday as the Brent marginally underperformed WTI crude oil
- The premium for Brent over WTI in September closes Friday at the $6.45 level down 15 cents since July 5
- August gasoline moves 2.46% higher while August heating oil futures rise 3.94% over the past week
- The gasoline crack spread in August was 3.16% lower after last week’s 10% gain while the August heating oil crack moved 1.91% higher since July 5
- Natural gas moved 1.45% on August futures closing the week at $2.453 per MMBtu on the back of Hurricane Barry. The EIA reported an injection of 81 bcf into storage on Wednesday for the week ending on June 28
- August ethanol moved 4.25% higher on the week as gasoline and corn prices strengthen
- November soybeans rise 4.14% since last week in post-WASDE trading
- December corn rises 3.84% on the week
- CBOT September wheat moves 1.55% higher since last week. September KCBT wheat trading at a 55.75 cents discount under CBOT wheat. The discount remains far from the historical norm with KCBT wheat trailing but the spread narrowed by 14 cents over the past week in post-WASDE trading
- October sugar falls 0.49% since July 5 and closes at 12.30 cents per pound
- September coffee declines 4.01% on the week
- September cocoa moves 1.62% higher since last week
- December cotton falls 6.20% on a bearish WASDE report
- September FCOJ futures moved 1.37% higher, as the price closes at $1.0340 per pound
- August live cattle moves 1.38% higher since last week
- August feeder cattle gain 2.00% since July 5
- August lean hog futures recover by 4.67% over the past week
- The September dollar index futures contract falls 0.48% on the week on the prospects for a Fed rate cut
- September Long-Bond futures trading at 153-15 down 1-22 for the week as the bonds follow through on the downside following the bearish reversal on July 5
- The Dow Jones Industrial Average closes at 27,332 on Friday, July 12, up 410 points from July 5. The S&P 500 rises by 0.78% since last week. The VIX falls 0.89 was trading at around 12.39 on Friday
- Bitcoin was trading at $11,667.96 on Friday up $728.07 or 6.66% since July 5, an ominous percentage.
- Ethereum was trading at $275.38 on Friday, down 3.91% since the last report
Price Changes for the week:
DBC closes at $16.06 per share, up 42 cents per share since July 5
DBC is the Invesco DB Commodity Tracking product which represents a diversified basket of commodities futures contracts, has net assets of $1.61 billion and trades an average daily volume of 849,167 shares. The fund summary for DBC states that it holds a diversified group of commodities futures but is weighted towards energy. Total average volume declined over the past week in a sign of falling interest in the commodities asset class even though prices moved higher.
Any investment involves substantial risks, including, but not limited to, pricing volatility, inadequate liquidity, and the potential complete loss of principal. This document does not in any way constitute an offer or solicitation of an offer to buy or sell any investment, security, or commodity discussed herein, or any security in any jurisdiction in which such an offer would be unlawful under the securities laws of such jurisdiction.