Treasuries have held within a fairly tight trading range to start to this week’s action, but continue to hold their ground above last Friday’s 3 1/2 month lows. In addition to a significant improvement in consumer spending, January US new home sales and a private survey of US consumer sentiment were higher than expected while the PCE inflation readings added to expectations that the Fed will end up raising rates higher than the expectations that were in place last week. On the other hand, treasury prices have fallen aggressively despite recession signals from the inverted Treasury yield curve, and following a significant jump in the New York Fed’s recession predictions from 47.3% to 57.1%. Recent Fed commentary have held a generally hawkish tone that continues to weigh on Treasury prices.
The Dollar held within a fairly tight range at the start of this week before it fell back from a 7 1/2 week high into negative territory. There was a mild rebound in global risk sentiment which fueled safe-haven outflows from the Dollar. While the dollar failed to show definitive strength early last week, the index ultimately gathered momentum and finished last week strong. In retrospect, positive US scheduled data and fresh signs of ongoing inflation pressures will justify ongoing strength in the dollar as we think the Fed will be pushed slightly closer to a 50-basis point rate hike at the March FOMC meeting.
The Euro survived a retest of its 2023 low from early January and is grinding out a modest gain early this week. The Yen reached a 2-month low early this week as it started out within a fairly tight range. The Swiss franc rebounded from a 2 1/2 month low as it was in jeopardy of posting a ninth negative daily result in a row. The Pound was able to build on early strength and posted a moderate gain following reports that the UK and EU are close to agreeing to a new Northern Ireland Brexit deal. The Canadian dollar is staying well clear of last Friday’s spike low but continued to hold within a tight trading range early this week.
Global markets have had a relatively quiet start to the week as they regained a mildly positive tone. Asian shares finished Monday with modest losses, but European stock markets posted sizable gains and US equity indices are seeing moderate gains. Over the weekend, Berkshire Hathaway reported lower than expected earnings which may dampen sentiment in many market sectors. While the Japanese leading economic index had a surprise downtick, Euro zone consumer confidence came in higher than trade forecasts.
The Emini S&P 500 managed to hold key support late last week and also managed to hold support at the 100-day moving average. The Emini Dow fell to the lowest level since November on the break Friday and the market also closed below the 100-day moving average for the first time since October 21.
GOLD, SILVER & PLATINUM:
Gold fell to its lowest level since December 22 early this week as the market fell on expectations that the Fed will continue its tight policy. Scheduled data on Friday suggested more tightening ahead. The Personal Consumption Expenditures price index rose 5.4% in January from a year earlier versus a 5.3% number in December. The month-on-month gain was 0.6% versus 0.2% in December. Goods fell 0.7% from the previous month, but services increased 0.5%. Consumer spending increased 1.8% last month, the biggest increase since March 2021.
Strong economic numbers could be positive for silver industrial demand, but the market followed gold lower on Friday and overnight, reacting negatively to the strong price data with March silver trading to its lowest level since November 4. Bloomberg reports that ETFs cut their holdings by 17,046 ounces in the last session and by 347,017 last week. It was the 11th straight day of declines. Silver holdings fell 3.194 million in the last session, a 1.7% decline.
April platinum moved higher early this week after trading to its lowest level since October 21. Like gold and silver, the market was pressured last week by higher-than-expected PCE and retail sales data that suggested the Fed would keep its tight monetary policy for a while. Palladium holdings were down 649 ounces in the last session and down 1,597 for the week.
After early downside follow-through, copper prices climbed into positive territory at the start of this week. In addition to risk-off anxiety flowing from a hard washout in equities, copper probably saw fresh selling on Friday after the pattern Shanghai copper warehouse stock inflows was extended for a ninth week in a row. LME copper stocks had a modest increase this morning; it was the fifth build in the past 10 sessions. Chinese equity markets had a lukewarm start to the week, but a moderate risk-on mood in European and US equity markets provided copper with some fresh support. The dollar has fallen back from an early 7 1/2 week high, and this has also underpinned copper prices.
Lukewarm domestic demand continues to weigh on crude oil prices, as are ongoing concerns with the status of China’s economy. Over the weekend, Russia cut the flow of crude oil from the Druzhba pipeline, which provides oil to Poland. They will reduce their March crude oil exports from their western ports by 25% from their February levels. Friday’s Baker Hughes US oil rig count showed a decline of 7 rigs last week to 600. This was only 1 rig above the 5-month low from February 3. US crude oil production reached a 2 1/2-year high at the start of February, and it held at that level in the past two weekly EIA readings, and there have been no outflows from the Strategic Petroleum Reserve.
Both product markets were outperforming crude oil as the start of this week, and ULSD has been the strongest member of the petroleum complex. US distillate stocks reached a 1-year high in the latest EIA report, but they remain more than 18 million barrels below their 5-year average. RBOB continues to see lukewarm driving demand, and the wintry weather across many areas of the US over the past few weeks has not helped. Implied gasoline demand has been below 9 million barrels per day since Christmas, and refinery utilization has been well below 90%, which is more evidence of lukewarm domestic demand.
Natural gas prices have been able to follow through on last week’s key reversal and could be on track for a fourth positive day in a row. The 6-to-10 and 8-to-14-day forecasts are showing below normal to well below normal temperatures across large portions of the US, which should boost demand. There are reports that the Freeport LNG export terminal continues to ramp up operations, and that should provide a boost to US export demand.
While May soybeans have traded lower for three sessions in a row, it appears the market will need to absorb further losses in soybean production from Argentina. There is very little rain in the forecast for the next two weeks and areas which did not receive rain just recently, could be back in stressful conditions very quickly. The Buenos Aires Grain Exchange slashed its soybean production estimate to the lowest in 14 years. Traders seem to believe that there will be enough supply from Brazil to offset the smaller crop from Argentina. Weakness in the corn market and a surge higher in the US dollar were seen as bearish forces.
The Buenos Aires Grain Exchange lowered their 2022/23 Argentine soybean production forecast to 33.5 million tonnes from 38 million tonnes previously. In February, the USDA pegged the crop at 41 million tonnes, up from 45.5 million in January.
Scattered showers continue for much of Brazil’s growing regions this week which may continue to cause delays for soybean harvest and safrinha corn planting, putting the corn at risk when the dry season begins in two months. Soybean harvest is thought to be near 30% complete from 41.8% last year. Dry conditions continue to be a concern for corn in Argentina as there is almost no rain in the forecast of the next two weeks. May corn closed sharply lower on the session Friday and the market is now down as much as 33 1/2 cents in just four trading sessions. A surge higher in the US dollar and technical selling were seen as bearish forces. The Buenos Aires Grain Exchange lowered their Argentine corn production forecast to 41 million tonnes from a previous estimate of 44.5 million. In its February WASDE report, the USDA lowered the Argentine corn production forecast to 47 million tonnes from 52 million in January.
The USDA Outlook Forum data carried a bearish tilt, with US 2023/24 ending stocks projected at 1.887 billion bushels, up from 1.267 billion in 2022/23.
May wheat closed sharply lower on the session Friday and the selling pushed the market down to the lowest level since September 2021. The downside break-out is bearish and leaves 687 1/2 as a longer-term technical target. July Kansas City wheat also closed sharply lower on the day and the market is down as much as 71 1/4 cents in just four trading sessions. Rain in the US and a sharp rally in the US dollar were seen as bearish forces. A winter storm brought heavy snow from northern Colorado through northern Nebraska and heavier rain in the southeast. The southwest plains were dry with strong winds, which may increase stress for winter wheat by drawing more moisture out of the soil. A storm Sunday into Monday will move on a more favorable track for widespread precipitation through the region. The 6-10 day and 8-14 day models show above normal precipitation for the central and southern Plains. The weekly export sales report showed that for the week ending February 16, net wheat sales came in at 338,828 tonnes for the current marketing year and 80,000 for the next marketing year for a total of 418,828.
The hog market has seen choppy and two-sided trade recently, as traders are fearful of increasing supply at a time of the year when we normally see seasonal strength. First quarter pork production usually comes in well below the fourth quarter of the previous year, but this year it is expected to be higher. It is also expected to be higher than a year ago. US export sales last week were decent, and pork production came in below year ago the previous week, and this lent some support. In the monthly cold storage report on Friday, frozen pork stocks at the end of January came in at 517.7 million pounds, up 19.2% from last year and up 13.4% from the previous month. Stocks normally increased 13% for the month so the increase was normal.
June cattle posted contract highs for the fourth session in a row last Friday before closing lower on the session, forming a sweeping key reversal from an overbought condition. Some long liquidation ahead of the Cattle on Feed report might be a factor in the selling. The report showed placements for the month of January at 96.4% of last year versus trade expectations for 97.1%, with a range of expectations from 95.5% to 99.7%. Marketings came in at 104.2% versus 103.9% expected (range 102.7%-104.9%). On feed supply as of February 1t came in at 95.9% versus 96.5% expected (range 95.7%-99.5%). With placements coming in below trade expectations and marketings a bit higher than expected, the report was viewed as supportive. The sharp drop in weights is keeping beef production low, and the placements are low enough to keep a supply outlook tight for the first half of the year.News that Brazil has halted beef exports to China due to mad cow disease has lent support to the cattle market as it is still uncertain how long the ban will last or how serious the outbreak is.
After reaching a 1-year high following the holiday weekend, cocoa prices finished last week with 3 straight negative daily results. Increasing near-term demand concerns may lead to additional long liquidation early this week, but cocoa is showing few signs that a near-term top has been put in. May cocoa was unable to hold onto mild early strength as it fell to a 1-week low before finishing Friday’s trading session with a moderate loss. For the week, May cocoa finished with a loss of 23 points (down 0.8%) which was a third negative weekly result over the past four weeks as well as a negative key weekly reversal. High inflation levels will weaken demand for discretionary items such as chocolate, so a higher than expected reading for US core PCE put early pressure on cocoa prices. In addition, the negative shift in global risk sentiment following US data fueled additional long liquidation and profit-taking in the cocoa market. There has been an easing of concern over tight near-term West African supply following the move by Ivory Coast’s Coffee and Cocoa Board to restrict purchases of additional cocoa beans by major exporters once they have reached their buying limit.
The coffee market remains on-course for a second positive monthly result in a row, but appears to have lost upside momentum late last week. Unless it can find fresh bullish supply news, coffee is likely to finish February on a downbeat note. May coffee was unable to find any footing as it extended a near-term pullback by finishing Friday’s trading session with a moderate loss. For the week, however, May coffee finished with a gain of 1.95 cents (up 1.0%) which was a sixth positive weekly result in a row. In many areas of the world, a large portion of coffee consumption occurs at restaurants and retail sales, so persistently high inflation levels have eroded coffee’s global demand outlook.
May cotton surged more than 3% on Friday and the market moved back into the recent consolidation. The market turned up from an extreme oversold technical condition and from low open interest. The strong US dollar and weakness in the stock market failed to pressure the market as traders see good short-term demand for cotton with strong export sales in recent weeks. US Cotton export sales for the week ending February 16 came in at 425,322 bales for the 2022/23 (current) marketing year and 11,880 for 2023/24 for a total of 437,202. This was up from 240,851 the previous week and the highest since last May. Cumulative sales for 2022/23 have reached 10.358 million bales, down from 12.582 million a year ago and the lowest since 2015/16. Sales have reached 92% of the USDA forecast for the marketing year versus a five-year average of 89%. The largest buyer this week was Vietnam at 131,204 bales, followed by Pakistan at 95,629, Turkey at 86,152, and China at 46,241.
Sugar reached a six-year high at the start of February and spent the next 3 1/2 weeks in a wide-sweeping coiling pattern. Many analysts are still projecting sugar to show a global production surplus for 2022/23, and that leaves the sugar market vulnerable to sizable downside move. May sugar had an abrupt change in fortune as it fell sharply from an early 3-week high before finishing Friday’s wide-sweeping outside-day session with a sizable loss. For the week, May sugar finished with a loss of 13 ticks (down 0.7%) which was a second negative weekly result in a row.
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