The US nonfarm payroll report was countervailing with a decline in the unemployment rate saving the positive economic view from the significant mess on the nonfarm payroll reading. Therefore, it is not surprising to see treasuries forge a relatively narrow range on a payroll report day. From an inflation perspective seeing average hourly earnings jump up to 4.7% and 0.6% on year-over-year and month over month basis respectively is a swing factor that left the overall report bearish to bonds. The December nonfarm payroll tally was a mere 199,000 compared expectations of 400,000 while the unemployment rate in December fell to an impressive 3.9% from 4.2% the prior month. With the 2-year note yield reaching a 2 year high, the track toward higher rates continues despite what could have been a very supportive US nonfarm payroll headline last Friday.
Clearly, the dollar index was undermined because of the “headline nonfarm payroll miss”. On the other hand, some traders claim that the totality of the US jobs report lends confidence to the idea that the economy continues to maintain positive traction despite record infection readings over the past 2 weeks. Going forward, even a minor slowdown in daily infections could suddenly reawaken bullish sentiment toward the Swiss franc, euro, and Pound. While the March dollar index has managed to respect the 96.00 level for most of the past 40 days, we detect a pattern of lower highs and lower lows and see the potential for a downside breakout below a key low of 95.57.
While the trade will be presented with US PPI and CPI readings this week, the US inflation story line appears to be moderating and without upcoming inflation readings “coming in hotter than expectations” the argument of transitory inflation could receive a lift. On the other hand, it is possible that the trade/economists have set a “low bar” for this week’s consumer and producer price inflation results. In our opinion, the miss on nonfarm payrolls last Friday provides the bear camp in the dollar with an edge. The Commitments of Traders report for the week ending January 4th showed Dollar Non-Commercial & Non-Reportable traders were net long 44,698 contracts after increasing their already long position by 2,251 contracts.
The equity markets showed relatively narrow trading ranges late last week for a day with significant jobs-related data. However, as indicated in other coverage, the nonfarm payroll report brought good and bad data which left the stock market flatfooted for most of the session. On the other hand, with another round of higher U.S. treasury yields the bear camp is getting the news it needs to control. It should be noted that the Dow continued to outperform other sectors of the market in what some traders and analysts suggest is the beginning of a sustained rotation from the NASDAQ. Going forward, we see positive US economic data as bad for stocks.
GOLD, SILVER & PLATINUM:
With a slight recovery in the US dollar, slightly higher US treasury yields and a good measure of risk off flowing from commodities and global equities, the gold market looks to have technical and fundamental resistance at the $1800 level to start the new trading week. After mounting a series of inflows last week, gold ETF holdings on Friday declined by 56,949 ounces bringing this year’s net purchases down to 103,872. With infections surging around the world, a Bloomberg article suggesting that China’s capacity to handle the surge will be a significant determinant for commodity price action in the coming weeks is right on the mark. While the closure of a key port city (Tianjin) in China due to infections is a negative sign, China’s capacity to act with impunity served it well in the very first surge of the coronavirus. However, given that omicron is more transmissible, the current wave could be more difficult to arrest.
Like the gold market, the silver market also forged a downside extension and aggressive rejection/recovery of a sub $22.00 trade. It should also be noted that the $22.00 level has been very credible support since late September, with that level potentially a long-term value zone. Unfortunately for the bull camp, a recent pattern of significant outflows from silver ETFs highlights a lack of investment interest in silver. Since the last COT positioning report, March silver into the low Friday declined by $1.15 and adjusting the most recent net spec and fund long reading for that action, the long could be near some of the lowest levels since June 2019! The January 4th Commitments of Traders report showed Silver Managed Money traders are net long 21,909 contracts after net buying 4,210 contracts. Non-Commercial & Non-Reportable traders are net long 44,554 contracts after net buying 1,806 contracts.
While the PGM markets have not paid much attention to classic inflation signals (like CPI and PPI), this week could bring a key test of the focus of the markets following an avalanche of inflation reports. In other words, platinum and palladium have not shown a tight correlation with gold and silver prices, but that relationship might manifest itself later this week. While UBS sees a PGM price recovery in 2022, analysts there prefer platinum over palladium because of substitution of cheaper platinum for palladium. In fact, UBS expects platinum substitution will be double last year at 300,000 ounces. As a result, UBS suggest palladium could see large surpluses in the coming 2 or 3 years! Recent PGM ETF flows have not shown a pattern, but a lack of investment interest is generally assumed. From a technical perspective, the net spec and fund short in palladium adjusted for the low last Thursday, would likely put the market at a new “record short”.
We continue to see the copper market caught in a trading range defined as $4.31 and $4.49 with that range enclosed by a larger range of $4.20 and at $4.53. In a limiting development, Chinese copper production is expected to remain high with a month over month gain in December of 5.4% resulting in a net gain for the year of 1%. In fact, some traders are suggesting China could export some copper which in the current condition would likely shift copper prices back down toward the bottom of the consolidation channel. However, we see a very minimal upward bias to start out this week with the market’s preference to trade in the upper half of the range defined as $4.35 and $4.50 remaining in place to start the new week.
With the crude oil market continuing to scratch out higher highs and higher lows into the end of last week, trend signals still favor the bull camp. However, the bull camp will likely need several closes above $80.00 to discourage talk of a top at a psychological level. Furthermore, a setback in crude oil prices below Friday’s lows to start this week could embolden short-term sellers. In supportive developments early this week, it should be noted that crude oil in global floating storage fell by 3.7% over the last week, Libya has seen weather reduce exports further and US temperatures have been more supportive of heating demand. However, with the recent OPEC decision to raise production in February, over-compliance with production cuts should begin to moderate, as those members capable of increasing production again will likely do so!
While the gasoline market also forged a higher high for the move last Friday, the higher high was incremental, and the February contract failed to hold the brunt of those gains. In a potential major negative development for gasoline and diesel prices, there were reports that Asian clean fuel flows toward the Americas in January are scheduled to exceed the flows seen in December. However, the latest positioning report in gasoline shows an average net spec and fund long and therefore the December and January rally has not put the market in an “overbought” positioning. The January 4th Commitments of Traders report showed Gas (RBOB) Managed Money traders were net long 74,520 contracts after increasing their already long position by 7,177 contracts. Non-Commercial & Non-Reportable traders net bought 7,256 contracts and are now net long 70,757 contracts.
With the net spec and fund short in natural gas near the highest levels since March 2020 and the February natural gas contract showing an extended sideways consolidation between $3.50 and $4.00, the market appears to have carved out a value zone. In fact, with the December lows prices have returned to those lows seen in June 2021 where the fear of severe winter tightness began to be factored. In other words, the market has removed the tight winter supply pricing premium with the potential for extreme temperatures possible but not projected to sustain at this time. Therefore, the big driving force for natural gas in the coming weeks is likely to be Russia and their actions toward the Ukraine and the flow of supply to or away from Eastern Europe.
The soybean market was called higher on the weather news but a negative tilt to outside market forces and continued general Covid fears helped to pressure. March soybeans pushed up to the highest level since June 11th on Friday. Southern Brazil and Argentina look to receive harsh weather over the next seven days with high temperatures and very dry conditions. This is likely to stress the crops and cause further production losses for the region. Exporters announced the sale of 120,000 tonnes of US soybeans for delivery to unknown destination for the 2022/2023 marketing year. For the supply/demand report, the average trade expectation for US 2021/22 soybean ending stocks is 353 million bushels, with expectations ranging from 305 to 411 million. This would be up from 340 million in the December update. US soybean production is expected to come in around 4.434 billion bushels (4.396-4.484 range), up from 4.425 billion in December. World soybean ending stocks are expected to come in near 99.7 million tonnes (95.0-103.6 range), down from 102 million in December.
The trade is looking for the USDA to lower Brazil’s production by 2.5 million tonnes and Argentina’s by less than 1 million for the report, but with the hot and dry weather forecast for the next week, traders think Brazilian production could eventually be lowered by about 13 million tonnes and Argentina by 4 million tonnes. If so, world stocks could tighten dramatically. For the grain stocks report, the average trade expectation for December 1, 2021 US soybean stocks is 3.128 billion bushels (2.975-3.227 range) versus 2.947 billion for December 1, 2020. Members of Coopavel, one of Brazil’s largest oilseeds and grains cooperatives, expect to harvest 50% less soybeans than initially forecast due to the severe drought that hit Parana state in November and December.
While the January USDA reports usually have a big impact on the grain markets, South American weather could dominate the news this year. The data in the reports was collected prior to January 1, but most of the weather damage in South America has occurred since then. This suggests that barring a complete surprise, the corn and soybean markets will not pay much attention to the reports. The market found support from the forecast for harsh weather for southern Brazil and Argentina over the next 7 days, weakness in the US dollar and strength in soybeans. Exporters announced the sale of 176,784 tons of US corn sold to Mexico.
March wheat closed sharply higher last Friday as the early break to the lowest level since October 15 failed to attract new buying interest. Strength in the other grains, weakness in the US dollar and talk of the oversold condition of the market helped to support. July Kansas City wheat closed moderately higher on the day after trading sharply lower and down to the lowest level since October 26. Jordan is tendering to buy 120,000 tonnes of optional origin wheat. For the winter wheat seedings report, the average trade expectation for US all winter wheat planted area is 34.3 million acres (33.3-35.6 range). This would be down from 33.6 million for 2021. For the supply/demand report, traders are looking for US 2021/22 all wheat ending stocks to come in at 609 million bushels (580-648 range), up from 598 million in the December report.
February hogs closed sharply lower on the session Friday after a higher opening. The selling pushed the market down to the lowest level since December 21st. Talk that the cash market will struggle to rally as much as normal over the next two months helped to trigger aggressive long liquidation selling. The two day Lean Index is at 73.57 so the opening at 83.07 was seen as too rich. Average weights are higher than normal which suggests some back up of hogs in the country and export news has been bearish. While there is seasonal strength expected at this time of the year, the latest monthly export report showed that exports represent just 24.1% of total production as compared with a peak last year in May of 33%. Monthly exports to China were the lowest since March 2019. The USDA pork cutout released after the close Friday came in at $82.90, down from $88.02 on Thursday and $89.10 the previous week.
February cattle closed slightly lower on the session Friday after choppy and 2-sided trade. A sharp break in the hog market helped to limit the advance. Traders remain nervous over the potential demand hit from the record high COVID case counts, but the beef market has held steady/firm for much of the week. The USDA boxed beef cutout was up $2.75 at mid-session Friday and closed $3.26 higher at $271.82. This was up from $265.26 the previous week and was the highest the cutout had been since December 6. Cash live cattle ended last week down slightly from the previous week. The 5-day, 5-area weighted average price as of Friday afternoon was 138.45, down from 139.59 the previous week.
Friday’s abrupt turnaround indicates that the cocoa market should continue to find solid longer-term support around last week’s lows. With bullish supply factors and an improving demand outlook, cocoa should see upside follow-through early this week. March cocoa continued to build on early support throughout the day as it went on to finish Friday’s trading session with a very large gain that broke a 5-session losing streak. For the week, March cocoa finished with minimal gain of 1 point which also resulted in a positive weekly reversal from Monday’s 5-week low.
Coffee prices have spent the past month vulnerable to additional long liquidation, either from quarter-end/year-end profit-taking or from annual commodity index fund rebalancing. Now that market focus should shift back towards bullish supply/demand factors, coffee could see a retest of its multi-year high from early December. March coffee was were able to follow-through on Thursday’s late rebound as it reached a 3-week high before finishing Friday’s trading session with a sizable gain. For the week, March coffee finished with a gain of 12.35 cents (up 5.5%) which broke a 2-week losing streak and was a positive weekly reversal from Monday’s 7 1/2 week low.
March cotton closed higher for the fifth straight week. Outside market forces were mixed. The dollar was weaker but so were the stock market and crude oil. For Wednesday’s USDA supply/demand report, the average trade expectation calls for US cotton 2021/22 ending stocks coming in at 3.46 million bales (range 3.00-385 million), down from 3.60 million in the December report. World ending stocks are expected to come in around 85.61 million tonnes (range 84.00-86.50), down from 85.73 million in December.
Sugar prices have had a sluggish start to the year as focus has shifted towards production in Thailand and India. The market has fallen well into technically oversold levels, however, so further strength in key outside markets can help sugar to regain upside momentum early this week. March sugar found early support, but turned back to the downside and reached a 5 1/2 month low before finishing Friday’s outside-day session with a moderate loss. For the week, March sugar finished with a loss of 83 ticks (down 4.4%) which was a third negative weekly result over the past 4 weeks.
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