Obviously, last Friday’s US nonfarm payroll result surprised the markets with the gain in payrolls more than 100,000 above expectations. However, the June gain in jobs was smaller than the gain in May and there were some prior month downward revisions. Clearly, the strength of the US jobs report reduces recession fear and ratchets up ideas that the US economy might withstand the additional rate hikes ahead. The treasury markets might have come under pressure from news that the Atlanta Fed President was in favor of a 75-basis point rate hike later this month, but more important news is some “hawks” at the Fed are thought to be lowering their post July rate hike plans.
Weakness in treasury prices early this week was a little suspect considering weaker global equity market action, fear of fresh Chinese lockdown announcements and a shift in market chatter from inflation to disinflation. However, the treasury markets are likely to benefit from comments from the Fed’s Bostic over the weekend indicating he was in favor of a 75-basis point hike later this month. Furthermore, the Fed’s Bostic indicated a “need to see more sustained, more significant slowing”. In fact, Bostic indicated that a 75-basis point rate hike would not result in protracted damage to the economy and suggested that the Fed needed to move aggressively.
With a major range up new contract high and sharp reversal in the dollar last Friday, the charts gave off the impression of a “blow off top”. In retrospect, the dollar deserves to rally following a much stronger than expected nonfarm payroll addition, but it is possible that some longs decided to bank profits rather than be exposed to a continuation of the reversal into the opening Monday. With the Swiss franc unable to bounce in the wake of a dip back in the dollar and strength in non-dollar currencies, it remains the weakest actively traded futures currency. While the dollar has not forged a fresh contract high early this week, we see residual buying interest from last Friday’s much better than expected US nonfarm payroll report.
The dollar also looks to garner ongoing lift from money fleeing the euro with a major gas pipeline shut down for maintenance reviving fear of an energy disaster in Europe. The dollar should draft support from comments from current and past Fed members with two views that the Fed needs to continue to act aggressively populating the headlines early on. However, the US scheduled report slate early this week is very thin which in turn should narrow ranges in the currencies. While the COT report is showing a significant overbought dollar condition, fundamentals remain patently bullish. The Commitments of Traders report for the week ending July 5th showed Dollar Non-Commercial & Non-Reportable traders reduced their net long position by 5,045 contracts to a net long 41,502 contracts.
The euro did not benefit from a favorable Italian retail sales reading for May which jumped by a very significant 1.9% over April! In the end, the trade appears to be focused on the euro returning to parity.
Not surprisingly, the Yen continued to fall on the charts from political uncertainty, soft machinery orders for May and from premature views that the assassination of former prime minister Abe will result in the moderation of decades of spending and stimulus.
The Pound continues to carve out a consolidation low pattern in what might be described as a pause for a political reset. In our opinion the Pound is less vulnerable than the euro and Swiss franc to the energy price threat but still facing enough uncertainty to remain pinned down to support by dollar strength
Obviously, economic uncertainty has been tamped down by last Friday’s stronger than expected US nonfarm payroll report. Certainly, the strong jobs report clears the way for the Fed to hike rates by 125 basis points in the next 2 meetings, but the equity markets have fully accepted that outcome. However, a very critical US inflation reading looms this week and with the economy showing up better in the jobs report, the Fed should feel it has a free hand to be aggressive if CPI is hot. Therefore, the rally in equities off the June low into the CPI report creates the potential for massive two-sided swings in prices ahead.
From a short-term technical perspective, the S&P is overbought from a 4-day rally of 180 points with the September contract approaching downtrend channel resistance.
While macroeconomics, Chinese infections and the debate over inflation/recession will live on in daily chatter, the markets will begin to react to 2nd quarter earnings and guidance news.Like the S&P, the Dow futures also maintain a significant net spec and fund short and that could moderate the aggressiveness of selling later this week.
GOLD, SILVER & PLATINUM:
A Reuters article early this week indicating the treasury markets have thrown over the battle with inflation for a battle with disinflation highlights a bearish environment for gold and silver. Therefore, we think the bull camp will continue to fight an uphill battle with the dollar showing signs of forging more contract highs, bigger and faster rate hike chatter flowing daily, and sagging investment interest verified by outflows from ETF holdings. In retrospect, gold and silver were on the wrong side of the inflation story over the past 4 months with the trade remaining largely convinced inflation would ultimately be controlled.
However, a near record spec and fund short combined with the world’s largest supplier at war with the world suggests that it is unwise to sell palladium. It should be noted that outflows from platinum ETFs have also picked up pace despite what some saw as good value at last week’s lows.
With the September copper contract into the close last Friday sitting $0.25 above last week’s lows and reports of infection problems in China that should leave the bear camp with control early this week. In fact, as testing results in Shanghai flow in, talk of significant copper demand destruction are likely to populate the headlines again. However, the copper market should see support from news that Peruvian copper production in May declined by 11% versus year ago levels.
In our opinion, crude oil is lucky to have avoided even larger losses at the start of this week as standard cyclical energy demand fears have been surfacing from widening recession expectations and that news has been joined by fresh Chinese Covid 19 restrictions. While not a front and center issue, recently unending strength in the dollar is likely costing the US some international oil sales business. Fortunately for the bull camp, the US jobs report was strong enough to temper fears of recession from over tightening by the US Fed. It should also be noted that net spec and fund long positioning in crude oil has fallen sharply since the June highs and could reduce downside volatility ahead.
Like the crude oil market, we see the gasoline market facing a potential demand destruction liquidation threat in the event the Chinese government puts large areas of Shanghai in lockdown.
Underpinning natural gas prices to start the week is a planned 10-day maintenance shutdown of the Nord Stream One pipeline and a widespread area of much above normal US temperatures (6-10 and 8-to-14-day forecasts).
After two weeks ahead of dry weather with much of the Midwest showing temperature highs in the mid-90s or into the 100’s, the soybean crop could be showing stress going into the key reproductive period during early August. A USDA report which may show tightening ending stocks this week may just add to the bullish tone. November soybeans closed sharply higher on the session Friday and this left the market closing higher on the week. The market managed to rally as much as 96 1/4 cents off of Wednesday’s low. Meal closed sharply higher on the day and sharply higher on the week, while December soybean oil closed higher on the session but well down for the week. A more positive tilt to outside market forces, strength in crude oil and more talk of drier weather in the extended forecast models helped to support.
A shift to a much drier and hotter weather pattern for the next two weeks opens the door for more aggressive buying from speculators over the short run. The five day weather forecast shows only trace amounts of rain across the Corn Belt. The 6-10 and 8-14 day forecast models show much above normal temperatures and below normal precipitation. For example, after five days of dryness in Omaha, beginning Friday there will be 9 of 10 days at 96 or above and continued dryness. How long the heat dome last is in question. December corn closed sharply higher on the session Friday, and this left the market with a gain of 16 cents for the week. The market rallied as much as 59 1/2 cents off of the lows Wednesday. Talk of drier weather ahead plus a positive tilt to outside market forces and strength in crude oil were all seen as supportive forces.
Ukraine’s corn stocks in the 2022-23 season are expected to climb six-fold versus the 2020-21 year, according to the UN’s Food and Agriculture Organization says in a report.
A much above normal temperature forecast for the spring wheat crop areas combined with the potential for a weather rally in the other grains may help support the wheat market over the near term. September wheat closed 55 cents higher on the session Friday and this left the market with a gain of 45 1/2 cents for the week. A lack of progress on the Black Sea front plus strength in the other markets helped to support. After the recent very sharp break, there seemed to be a lack of aggressive new sellers on the rally. Talk of some demand from China helped to provide buying support as well. Traders are positioning ahead of the USDA Crop Production and Supply/Demand report.
August hogs closed lower on the session Friday but well up from the early low. The market held minor support on the early setback as the recent strength in the pork market plus ideas that pork production will remain relatively tight in the next month helped to support. The USDA pork cutout, released after the close Friday, came in at $112.62, up $2.50 from Thursday and up from $107.61 the previous week. The USDA estimated hog slaughter came in at 468,000 head Friday and 118,000 head for Saturday. This brought the total for last week to 1.983 million head, down from 2.281 million the previous week but up from 1.916 million a year ago. Estimated US pork production last week was 426.1 million pounds, down from 494.6 million the previous week but up from 401.4 million a year ago. The CME Lean Hog Index as of July 6 came in at $110.16, up from $109.93 the previous session.
August cattle closed moderately lower on the session last Friday after trading higher on the session early in the day. Demand concerns persist and traders see somewhat ample supply short-term. With high gas prices and inflation for basic commodities, short-term consumer demand for higher price beef cuts might be in question. The USDA boxed beef cutout was up 7 cents at mid-session Friday and closed 18 cents lower at $267.89. This was up from $263.82 the previous week. Cash live cattle trade was moderate for a Friday with trades consistent with earlier in the week. As of Friday afternoon, the 5-day, 5-area weighted average price was 143.56, down from $145.10 the previous week but well up from August (133.95).
Since the start of April, cocoa has been unable to sustain recovery moves as near-term demand concerns continue to be a major source of pressure. While the market will received key demand-side data this week, cocoa may slide further to the downside before it can find a near-term floor. September cocoa saw downside follow-through from Thursday’s late pullback as it finished Friday’s trading session with a sizable loss. For the week, however, September cocoa finished with a gain of 4 points (up 0.2%) which broke a 2-week losing streak and was a positive weekly key reversal.
Coffee prices started July with a wide-sweeping outside-day down session and a 4-session losing streak, but the market continues to hold its ground within a wide consolidation zone since early March. With bullish supply developments providing underlying support, coffee may be able to see upside follow-through this week. September coffee came under midsession pressure and reached a new 6-week low, but rallied late in the day to finish Friday’s trading session with a mild gain and a positive daily reversal. For the week, however, September coffee saw a loss of 4.20 cents (down 1.9%) which was a fourth negative weekly result over the past 5 weeks.
With the oversold condition of the market and strength in grain markets overnight, December cotton looks vulnerable for a rally into the USDA report. The five day forecast has turned very dry for West Texas, and the 6-10 day forecast models and the 8-14 day forecast models both show above normal temperatures and below normal precipitation for West Texas. This would suggest deterioration in the cotton crop over the next two weeks. For the USDA report on Tuesday, traders see US production near 16.03 million bales, 15.25-17.31 range, as compared with 16.50 million bales in the June estimate.
Sugar’s sizable 3-day rally was fueled in part by renewed strength in key outside markets. However, there have been supply-side developments that can help the sugar market maintain upside momentum this week. October sugar shook off mild early pressure and rallied to a new 4-week high before finishing Friday’s trading session with a sizable gain. For the week, October sugar finished with a gain of 95 ticks (up 5.3%) which broke a 6-week losing streak and was a positive weekly reversal from Tuesday’s 4-month low.
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