Written Commentary
BONDS:
Clearly, the massively better than expected jump in US nonfarm payrolls, the lowest US unemployment rate since 1964 and a very strong ISM reading justified the hard wash in treasury prices today. However, treasuries have displayed significant bullish resiliency for months and a portion of the trade continues to embrace the idea that even higher US interest rates will ultimately result in recession. Treasuries have followed through on last Friday’s pullback with sizable early losses coming into this week’s action, with Bonds reaching a 3-week low and 10-year notes falling to a 4-week low.
The US employment situation report featured a January non-farm payroll reading that was far above trade forecasts as well as a surprise downtick in the unemployment rate to a 69-year low, while average hourly earnings were roughly in-line with trade forecasts.
CURRENCIES:
While we are not sure if the dollar paradigm has shifted with the extremely strong US jobs report, the magnitude of the low to high rally over Thursday and Friday of 200 points certainly unnerves the bear camp and emboldens the bull camp. It should be noted that instead of the dollar plummeting off reduced flight to quality following the strong payroll report, the trade seems to have shifted to interest in the dollar from the prospects of even higher US interest rate yields ahead and because of an expanded macroeconomic edge.
The Dollar has extended its recovery move to a 4-week high early in this week’s action and is close to climbing back above its 50-day moving average for the first time since early November. Last Friday’s blockbuster non-farm payroll reading has likely pushed a potential Fed pivot beyond the March FOMC meeting. With slumping global equity markets and yesterday’s strong earthquake in Turkey, the Dollar is also receiving fresh safe-haven flows early this week.
The Euro has followed through on an outside-week down and a weekly reversal with moderate early pressure at the start of this week. The Yen has started out this week with a gap-lower opening and is now within striking distance of a 1-month low. While Japanese inflation has been on the rise, the BOJ remains far from taking a hawkish shift in policy. After a 2-cent pullback from last Thursday’s 8-month high, the Swiss franc appears to have found its footing as it has only found mild pressure and continues to hold its ground above last Tuesday’s low. The Pound has reached a new 1-month low, but it continued to hold within a fairly tight trading range after losing 3 cents in value on Thursday and Friday. The Canadian dollar remains on the defensive and is finding moderate pressure early this week. appetites improve.
STOCKS:
While the equity markets fell sharply in the face of an extremely positive monthly jobs report, prices recovered, and it is possible that the era of bad economic news is good for stock prices (because of the Fed threat) has ended. Certainly, corporate news flow will continue to be a headwind and a considerable amount of economic uncertainty remains in place regardless of the January jobs surprise. In retrospect, it is impressive for the stock market to regain its footing late last week in the face of disconcerting mega tech news.
Uncertainty normally causes increased selling pressures. There is plenty of uncertainty this week as the market continues to attempt to absorb the extremely positive monthly jobs report which triggered the lowest US jobless rate since 1969. Uncertainty over how fast the Fed will act to tackle inflation, fears of weakening corporate earnings and fears over trade relations with China after the balloon incident are all seen as negative forces.
GOLD, SILVER & PLATINUM:
Gold prices were higher at the start of this week despite a stronger dollar, as Friday’s selloff appears to have attracted some buyers. The jobs report on Friday came in much stronger than expected, which stoked fears that the long-awaited Fed pivot could be put off. This sparked a rally in the dollar and steep declines in gold and silver. Prior to the report, a trend of moderating inflation measures had prompted expectations that the Fed would end its rising rate policy soon. But Friday’s jobs report showed a much larger increase in payrolls for January than expected and the US unemployment rate falling to its lowest level since 1969.
March palladium traded to a new contract low early this week, while April platinum saw a modest recovery after Friday’s steep selloff. Like gold and silver, the PGMs have felt pressure from the surprisingly strong jobs report on Friday, but unlike gold and silver, neither of these markets were in an uptrend, and neither had reached overbought status prior to the selloff. Gold’s fundamental support stems from central bank and investor buying.
COPPER:
Copper has had a rough start to February, as it closed lower for the third straight day on Friday and fell to a new four-week low at the start of this week. Friday also marked the second straight weekly decline. The negative shift in global risk sentiment following the strong US jobs report on Friday and the strong recovery in the dollar have made it difficult for copper to find its footing, much less regain upside momentum.
ENERGY COMPLEX:
Crude oil prices were nearly unchanged at the start of this week after pushing lower, but they remain well below their late-January highs. It appears that crude oil and the products need to see stronger global risk sentiment to regain upside momentum. March crude oil ended last week $6.29 lower (down 7.9%) for its second negative week a row. The strong US jobs report on Friday initially pulled prices higher, but the market lost momentum and violated some key chart support levels, which opened the door for heavy selling. The markets seemed to discount several positive headlines, such as a sharp, 13.2% increase in Spanish crude imports for December and increased uncertainty regarding product availability with the start of the EU ban on Russian fuel imports.
The Baker Hughes US oil rig count on Friday showed rigs in operation declining by 10 rigs last week to 599. This was the largest decline since June 2020 and was the lowest total number since September. Over the weekend an official with the International Energy Agency (IEA) said that major oil producing nations may have to reconsider their output policies following a demand recovery in China. The Saudi oil minister said that sanctions and underinvestment could lead to a shortage of energy supplies in the future.
Natural gas traded in a narrow range early this week and managed to hold above Friday’s two-year lows. The market has fallen 40% since the start of the year and is deep into oversold territory, and it may not take much in the way of bullish supply news to fuel a short-covering rally. Despite steep declines in other energy markets, March natural gas finished Friday with only a moderate loss.
BEANS:
There is no rain in the five day forecast models for Argentina, but scattered rain events emerge in the 6-14 day models. The outlook for some rain into the weekend and next week might be enough to spark some long liquidation selling. It is a tough call at this point as traders cannot rule out that the forecast turns drier. March meal remains in an uptrend and pushed to new contract highs again Friday. Meal remains in a tight situation in South America as long as Argentina crush remains slow and until there is more plentiful supply of new crop soybeans to crush. Argentina’s exports of meal in January are estimated to have been the lowest for that month in any year since 2002. A combination of the Argentina drought and the late harvest in Brazil has helped to support but these factors could change soon.
CORN:
The forecast is not as bearish as it was over the weekend, but there are some rains into next weekend and next week for Argentina. Five days of hot and dry weather is likely to cause more damage, and bullish traders might be hoping that the 6-14 day forecast models dry out. Given the technical action however, sellers could remain active over the short term. March corn managed to close higher on the session Friday after the early break to the lowest level since January 24 failed to attract new selling interest. Even with the bounce, the market closed lower on the week. South Korea bought 126,000 tonnes of corn and Egypt bought 60,000 tonnes of corn from Ukraine. Outside market forces carried a bearish tilt with a strong rally in the US dollar and a sharp break in crude oil.
WHEAT:
With smaller crops in Russia and Ukraine, and a continued drought conditions in the US, early spring weather will be an important indicator for direction. The USDA update seems unlikely to include much in the way of surprises. March wheat closed lower on the session Friday as the early rally to the highest level since January 4th failed to attract new buying interest. The market managed to close higher on the week. July Kansas City wheat also closed lower on the session but still higher on the week. Open interest has traded up to the highest level since March. European milling wheat futures traded higher Friday supported by the sharp drop in the euro against the dollar. Outside market forces for Chicago wheat were bearish with weakness in the stock market, weakness in the crude oil market and a very sharp rally in the US dollar.
HOGS:
Talk of the oversold condition of the market and a bounce in pork product prices last week helped trigger a two-day jump off the lows in April hogs. The USDA pork cutout, released after the close Friday, came in at $77.32, down $2.34 from Thursday and down from $77.70 the previous week. The upside seems limited, as the supply fundamentals look bearish enough to drive the market significantly lower if the premium of April Hogs to the cash market is challenged. We do not see the justification for the large premium. As of February 1st, April Hogs were trading at an 11.68 premium to cash. Last year, the premium was 12.36, but the five-year average is 5.27.
CATTLE:
April cattle traded to a new contract high on Friday after choppy and two-sided trade. June and August cattle also posted new contract highs. The estimated average dressed cattle weight last week was 827 pounds, down from 829 the previous week and 845 a year ago. The 5-year average weight for that week is 833 pounds. Estimated beef production last week was 529.1 million pounds, down from 552.5 million a year ago. The USDA boxed beef cutout was down 20 cents at mid-session Friday and closed 36 cents lower at $264.74. This was down from $267.76 the previous week and was the lowest it had been since December 19. Cash live cattle trade was very quiet last week. There were 5,512 head reported from Iowa/Minnesota over the course of the week at an average price of 156.93, up from 154.72 the previous week. The only other trades reported were 90 head in Kansas on Thursday at 154 versus an average of 155.93 the previous week. This was not enough for an adequate test.
COCOA:
Cocoa prices have had trouble sustaining upside momentum since reaching an 8-month early in January. Demand concerns remain a source of pressure and could fuel a near-term pullback this week. March cocoa was able to rebound from early and midsession pressure but could not climb back into positive territory as it finished Friday’s trading session with a moderate loss. For the week, March cocoa finished with a loss of 58 points (down 2.2%) which was a second negative weekly result over the past 3 weeks. A negative shift in global risk sentiment following US jobs data pressured the cocoa market as that may diminish near-term demand prospects.
COFFEE:
Coffee’s nearly 30% increase in value since the mid-January lows has left the market overbought and vulnerable to a near-term pullback. Unless there is a significant rebound in global risk sentiment, coffee could see further downside price action early this week. March coffee opened under pressure and remained on the defensive all day as it finished Friday’s trading session with a sizable loss. For the week, however, March coffee finished with a gain of 2.90 cents (up 1.7%) which was a third positive weekly result in a row.
COTTON:
March cotton experienced choppy, sideways action last week and spent the entire week inside Monday’s range. Outside market forces were negative to cotton. The dollar rallied sharply higher in the wake of a strong US payrolls report that increased expectations that the US Fed will resume aggressive rate hikes and/or extend the duration. Crude oil was down, which makes man-made fibers more competitive with cotton. The stock market was down as well. The suspected Chinese supply balloon detected over the US raised concerns about further deterioration in US/China relations and the potential impact on cotton exports.
SUGAR:
Sugar finished January with a seven-session winning streak that took prices to their highest levels since November 2016. However, the market followed that with a key reversal, which suggests at least a near-term top is in place. March sugar found mild early support before turning sharply to the downside as they finished Friday’s trading session with a heavy loss. For the week, however, March sugar finished with a gain of 28 ticks (up 1.3%) which was a third positive weekly result over the past 4 weeks.
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