The confusion created by various Fed Governor statements this week is leaving us wondering…what’s next from the Fed? One concern voiced was of rising inflation risks which would indicate a willingness to raise rates. Another was that if the reversal of the current course was considered it would stall the recovery. That leaves us with the question of who’s in charge here?
At any rate, the reality of higher food and energy prices are, in fact, inflationary, and will be in the forefront of Fed thinking. My expectation is that higher interest rates are in store for the U.S. The ECB is also considering raising rates and if that occurs, the pressure on the U.S. Fed to raise rates will increase since any ECB rate increase would negatively impact the U.S. dollar vis-à-vis the defacto U.S. rate decline relative to the UCB rate.
New York Fed President William Dudley said the "firming of economic activity is welcome and not a reason to reverse course." The Philadelphia Fed President Charles Plosser had told reporters Friday that "it’s certainly a possibility" that the central bank may have to raise interest rates before the end of the year. That leaves us in a quandary since rate movement affects all dollar denominated commodities in as much as its impact on the U.S. currency. For that reason we once again have to temper our remarks until some clarity emerges from Mr. Bernanke and his "gang that can’t shoot straight" at the Federal Reserve…
Interest Rates: June Treasury bonds closed at 12012, up 6 ticks and relatively unchanged from a week ago. The U.S. economy reportedly added more jobs than expected in March thereby reducing the unemployment rate by one tick from 8.9 to 8.8%. We believe, as some economists do, that the real rate is closer to 17% given the workers taking jobs that pay less than the ones they lost. Also, the fact that the Federal Government has more workers on its payroll than all other sectors of the economy…combined, makes the economy vulnerable to the current round of calls for budget cuts. We remain convinced that with inflationary pressure from food and energy, we will see rate increases in the future. We continue to suggest selling bonds on rallies, selling calls or buying puts or a combination of both.
Stock Indices: The Dow Jones industrials closed at 12378.72, up 56.99 after posting a 110 point plus gain during the session. Profittaking after the strong week prompted liquidation towards the end of the session. For the week the Dow gained 1.3%. The S&P 500 closed at 1332.41, up 8.58 and gained 1.4% for the week. The tech heavy Nasdaq closed at 2789.80, up 8.53 and posted a 1.7% gain for the week. The positive economic data along with the labor department report of increase in the number of jobs and the tick lower for the unemployment rate all contributed to the rally this week. We feel the so called economic recovery has slowed and the inability for the political parties to agree to budgetary cuts could shut down the government albeit temporary. Our dismay at witnessing continued strength in equities while the overall economy remains mired in recession, in our opinion, has cost our clients some money. We continue to expect a sharp selloff in equities and recommend implementing hedging strategies.
Currencies: The June U.S. dollar index closed at 7606.5, down 7 ticks against gains in the Euro 35 points to 14216, the British Pound 52 points to 16104, the Canadian dollar 43 points to 10349, and the Australian dollar 24 points to 10297. The June Swiss franc lost 87 points to 10831 but was a correction after recent sharp gains. The June Japanese yen lost 143 points to 11897 tied to the disastrous effects of the earthquake and tsunami. That country is undergoing serious financial difficulties. We are starting to take another look at the dollar index since any increase in U.S. rates would benefit the dollar. However, if the ECB raises rates with the U.S. Fed following, that would put additional downward pressure on the dollar. For now it is a trading affair.
Energies: May crude oil closed at $107.94 per barrel, up $1.22 tied to the gains in equities and continued concern over the Libyan situation. With rebel insurgents losing ground in Libya uncertainty over oil supplies remains. We favor the sidelines even though Libyan oil is mostly exported to Europe and not the U.S.
Copper: May copper closed at $4.2560 per pound, down 5.15c on profit taking in front of the weekend. Managed commodity funds and hedge funds had been bullish on copper after U.S. Commodity Futures Trading Commission data showed large speculators added 3,759 new long positions betting on higher prices and reduced their short positions by 2,529 contracts. We are bearish on copper tied to our overall negative assessment of the U.S. and global economies.
Precious Metals: June gold closed at $1,428.90 per ounce, down $11 on stronger than expected employment data. Early losses were reversed after the New York Fed President made his dovish comments favoring a continued monetary easing. We disagree with him and suggest that the Fed will in fact be looking at discontinuing the stimulus program and prompt higher rates based on inflationary ideas. May silver closed at $37.732 per ounce, down 15.6c following gold. While we have favored silver in the past due to the percentage gain disparity between gold and silver, we would take some profits off the table. July platinum closed at $1,776.90, down $6.30 with June palladium gaining $7.15 per ounce to close at $775.05. We like the long palladium/short platinum spread. Otherwise watch from the sidelines. Global geopolitical events and interest rate concerns will move these markets one way or the other. We do not subscribe to the "coin flip trading method".
Grains and Oilseeds: May corn closed up 42 3/4c at $7.36 per bushel, the highest price since the 2008 food crisis. A decline in inventories reported this week added to supply concerns. We could see further short squeeze in the near term. Stay out for now. May wheat closed at $7.59 ½ per bushel down 3 3/4c on profittaking after recent price gains that followed corn. We prefer the sidelines in wheat. May soybeans closed at $13.93 ¾ per bushel down 16 1/2c on profittaking. The March first USDA soybean inventory estimate was lower than expected and prompted buying in beans and products as well. We expect further wide price swings as additional supply/demand numbers emerge. Stay on the sidelines for now but we like soybeans on further pullbacks. May soybeanoil closed at 58.68c per pound, down 10 points while May soybean meal lost 98 points to close at $360.90 per ton. July rice closed at $14.13 per hundredweight, down 17.5 points. We are out of rice at the present time.
Coffee, Cocoa and Sugar: May coffee closed at $2.6045 per pound, down 3.7c and at a 1 ½ month low. Concern that recent price gains may hurt demand and the doubling of coffee prices over the past year played a roll in the long liquidation. The ICO’s cut its 2010-2011 global coffee production estimate and that could prompt tight supplies and additional buying. We prefer the sidelines. May cocoa closed at $3013 per tonne, up 61 dollars on continued reluctance of farmers to sell. The political stalemate in Ivory Coast and confusion as to what the government will do about exports prompted recent buying of cocoa. Fridays action was profittaking and fund selling. Cocoa prices have risen to a 32 year high last month and without additional fundamentals, we could see further corrective selling. Stay out for now. May sugar closed at 27.45c per pound, up 34 points tied somewhat to China’s 7% lower production from last year. China is the world’s third largest sugar producer and second largest consumer. The decline in sugar output is of some concern and prices remain mired in a range between 32c and 25c. Stay out for now.
Cotton: May cotton closed at $1.9555 per pound down 4.68c with July losing 4.8c to close at $1.8810. Output from Pakistan, the fourth largest cotton grower, and some selling from previous farmer withholding from market could prompt additional long liquidation. We continue to favor the short side of cotton but for retail clients, through the use of put buying.
John L. Caiazzo
Information provided is from sources deemed to be reliable but not guaranteed. Futures and Options trading involve a high degree of risk and may not be suitable for everyone. John Caiazzo is a registered commodities broker with over 40 years experience in investments and opinions are his own and not of the Futures Commission Merchant to which he introduces his clients.