Last Friday’s European data included a better than expected reading for Italian industrial production, but the May US CPI result was much stronger than expected and reached the highest year-over-year rate since December 1981. While Canadian unemployment had a surprise downtick, a private survey of US consumer sentiment came in much lower than expected. Treasuries were pressured by Fed rate hike expectations and closed last Friday’s session with sizable losses. Following last Friday’s wide-sweeping outside-day down session, the Treasury markets remain under significant pressure coming into this week’s action.
The Dollar became the safe-haven destination of choice and has risen to a 3 1/2 week high during last Friday’s action. A multi-decade in CPI more than offset an all-time low in a private survey of consumer sentiment to ramp up Fed rate hike prospects that have given the Dollar a significant boost. On the other hand, concern over fragmentation of Euro zone debt yields has weighed heavily on the Eurocurrency going into the weekend.
The Dollar continues to the upper hand on most major currencies and is within striking distance of reaching a multi-year high. With bond yields on the rise in many nations, the Dollar continued to be the safe-haven destination of choice while global markets are in a “risk off” mood.
The Euro followed through to the downside as it reached a new 4-week low. The Yen has rebounded from a new multi-year low and climbed up into positive territory at the start of this week’s action. The Swiss franc is heading for a seventh daily decline in a row as it is under significant pressure early in today’s action. The Pound has extended its downside breakout from its May/June consolidation zone with sizable early losses. The Canadian dollar is more than 2 cents below last week’s high as it has retraced more than half of its May/June rally.
Global markets continue to hold a negative tone during last Friday’s trading session. Shanghai and Beijing continue to have COVID restrictions that are casting a shadow over many market sectors. In addition, surging US inflation levels have also eroded prospects for US economic growth during the third quarter. US equity markets fell to new 2 1/2 week lows before finishing with heavy losses. Global markets remain under pressure early this week as they were holding a mostly negative tone. Comments of a “ferocious” COVID outbreak in Beijing have ramped up risk anxiety in many market sectors. Asian stock markets finished with heavy losses and were led to the downside by the Japanese Nikkei and Hong Kong Hang Seng indices. European data included lower than forecast results for UK industrial production and UK manufacturing production, while major cryptocurrencies bitcoin and ethereum reached new 17-month lows.
GOLD, SILVER & PLATINUM:
Gold was sharply lower at the start of this week after a failed attempt to follow through on Friday’s rally. Friday’s hot CPI number continues to reverberate across the financial markets, with the dollar higher and stocks and bonds expected to come in sharply lower, and this is feeding volatility in gold. The market to reacted Friday’s CPI with a sudden reversal and rally, despite sold gains in the dollar. Until Friday, strong inflation numbers had tended to be negative for gold as the dollar rallied on expectations that the Fed would increase rates. But at some point, if the trade starts to think that the Fed is not getting a grip on inflation, it will view gold as a hedge, and this appears to be what happened on Friday.
The PGM’s bounced off their lows on Friday after a higher-than-expected CPI report, but their moves were nowhere near as impressive as gold, as they closed lower on the day, and resumed their downtrends early this week. Whereas gold found strength from its role as an inflation hedge, platinum and palladium, which are more dependent on supply/demand fundamentals, were limited by worries that the Fed will be forced to become more aggressive and will be willing to risk a recession in the name of fighting inflation.
Copper prices remained on the defensive early this week and were on-track for a third heavy daily loss in a row. Since reaching a 6-week high on June 3, the market has only had one positive daily result, as demand concerns in China and around the world globe continue to weigh on prices. Unless there is a significant rebound in global risk sentiment, look for further declines this week. September copper finished Friday with a heavy loss, and it has slumped to a new 3 1/2 week low overnight. It finished last week with a loss of 17.75 cents (down 4%), which breaking a three-week winning streak. The washout in global equity markets following the US CPI data on Friday has cast a shadow over the market, as global risk sentiment has been significantly diminished.
While petroleum prices remain close to their 2022 highs, they saw a negative shift in tone late last week that has continued into this week. Unless there is a significant turnaround in global risk sentiment, crude oil and the products are vulnerable to even more profit-taking and long liquidation. July crude oil closed lower on Friday and is lower again this morning. It did finish the week with a gain of $1.80 (up 1.5%), for the seventh positive week in a row. The market found support from reports that Libya’s crude oil production has fallen by 1.1 million barrels per day and that India’s demand for petroleum products reached a 13-month high in May and was more than 24% above last year.
The products finished on a downbeat last week, with July ULSD having a negative key reversal on Friday and July RBOB having an outside day down session and a negative key reversal for the week. They remain under pressure early this morning. It looks like natural gas could continue its choppy price pattern over the next few days. There are reports that Texas will have record high power demand Monday, and that should provide some measure of support to the natural gas market.
The 6-10 day forecast models are quite threatening, but the 8-14 day model still shows above normal temperatures, just not quite as hot, and the outlook calls for below normal precipitation for Missouri, Illinois and Indiana but near normal for the Western Corn Belt. This is not quite as bullish as last week’s models. The USDA report carried a bullish tilt as old crop export demand increased 30 million bushels which helped to tighten beginning stocks for the new crop season. The report failed to bring any major surprises to the market, so the focus of attention over the next month will likely be on the weather. Traders will also monitor the planted area update for this afternoon to see how far behind planting is for North Dakota.
The USDA update failed to provide any major surprises, but did not show as strong demand as some traders had anticipated. The weather forecast suggests the corn market may build some weather premium. In addition, traders will monitor crop conditions Monday afternoon, but especially the extent of planted area in North Dakota. The USDA supply/demand report Friday left yield, acreage, and production estimates for the 2022/23 season unchanged from last month. Ending stocks came in at 1.400 billion bushels versus 1.360 billion in May. Ending stocks for 2021/22 came in at 1.485 billion bushels versus 1.440 billion in May. Beginning stocks came 45 million bushels higher than last month. This was contrary to expectations for them to be tighter, and it lent a bearish tone to the market.
The USDA report news was a mixed bag and the market is likely to follow the other grains over the near term. The USDA reduced India exports by 2 million tonnes to 26.5 million which was seen as a positive, but Russia exports were raised by 1 million tonnes to 40 million which would be their second largest total on record. IKAR raised their Russian wheat production estimate to 87 million tonnes from the prior forecast of 85 million. September wheat closed unchanged on the session with an inside trading day. US 2022/23 all wheat production came in at 1.737 billion bushels versus an average expectation of 1.72 billion and a range of expectations from 1.63 to 1.76 billion. This was up from the May estimate for 1.729 billion. USDA in May forecast the lowest output of wheat the grain since 1963. All wheat ending stocks for 2022/23 came in at 627 million bushels versus an average expectation of 623 million (range 550 to 680 million) and 619 million in the May report. If so, this would be the lowest ending stocks since the 2013/14 season.
Pork values seem to have stabilized, and many traders see seasonal demand as strong. July hogs closed higher on Friday but well off their early highs, as a move above Thursday’s highs failed to attract new buying interest. The short-term fundamentals still look negative, but the market is oversold enough that there may be a short-term technical bounce. The CME Lean Hog Index as of June 8 was 107.31, down from 107.48 the previous session but up from 105.03 the previous week. The USDA pork cutout, released after the close Friday, came in at $107.57, up from $106.95 on Thursday but down from $107.71 the previous week.
August cattle closed moderately lower on Friday, as outside market forces were quite negative and kept sellers active. The lowest consumer sentiment reading on record suggests consumer spending on anything that is not essential might fall. Talk of the short-term overbought condition of the market and fears of weakening demand helped pressure prices. The estimated average dressed cattle weight last week was 815 pounds, down from 820 the previous week and from 817 a year ago. The 5-year average weight for that week is 810 pounds.
Cocoa prices will start out this week at the lowest level since early December. While near-term demand concerns have been given additional fuel by the negative shift in global risk sentiment, a bullish supply outlook can help cocoa prices find their footing. For the week, September cocoa finished with a loss of 73 points (down 2.9%). Continued deterioration in global risk sentiment was given a significant boost by multi-decade highs in the US CPI index. This has become a notable source of pressure on the cocoa market as surging inflation is likely to weaken near-term demand prospects due to chocolate, as it is a mostly discretionary purchase for many global consumers. In addition, a huge selloff in the Eurocurrency put carryover pressure on cocoa prices as that will make it more difficult for Euro zone grinders to acquire near-term supplies.
Near-term demand concerns have become a notable source of pressure and the bearish tilt to outside market forces added to the negative tone. For the week, September coffee finished with a loss of 3.75 cents (down 1.6%) which broke a 4-week winning streak. A more than 1.5% loss in the Brazilian currency as it reached a 3 1/2 week low on Friday was a notable source of pressure on coffee prices, as extended currency weakness could encourage Brazil’s farmers to market their near-term supply to foreign customers. The Brazilian trade group Cecafe said that their nation’s May Arabica exports came in at 2.407 million bags which was more than 15% higher than last year’s total.
The USDA supply demand reports had no changes for the US 2022/23 cotton outlook, but it did come in at the bullish end of expectations, which had called for an increase in production and ending stocks. The report put production at 16.50 million bales versus an average expectation of 16.77 million (range 16.00-17.90 million) and ending stocks at 2.90 million versus 3.11 million expected (range 2.60-4.00). In a similar vein, the world numbers tightened slightly from last month versus expectations for a slight increase in supply. World production for 2022/23 came in at 121.27 million bales, up from 121.06 million in the May report and slightly above the average expectation of 121.25 million (range 119.50-124 million). However, ending stocks came in at 82.77 million bales, down from 82.82 million in May and below the average expectation of 82.90 million (range 81.50-85.82 million).
Sugar has been pressured by recent weakness in key outside markets, and has reached its lowest price levels since mid-May. Unless there is a positive turnaround in global risk sentiment, sugar may continue to slide further to the downside as the market is vulnerable to long liquidation selling. Sugar positioning in the Commitments of Traders for the week ending June 7th showed Managed Money traders were net long 168,137 contracts after decreasing their long position by 17,127 contracts which is a long liquidation selling trend. Non-Commercial & Non-Reportable traders are net long 237,805 contracts after net selling 9,003 contracts. For the week, October sugar finished with a loss of 40 ticks (down 2.1%) and a third negative weekly result in a row. Energy prices had a heavy midsession selloff that put carryover pressure on the sugar market as that could weaken near-term ethanol demand prospects.