"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput


Tuesday, June 17, 2014

Upcoming FOMC spooks Gold Bulls

Gold went one way today ( down ) while the mining shares went the other ( UP). Traders cited concerns over the upcoming FOMC meeting where the fear is that Yellen will strike a more hawkish tone.

Reinforcing that was today's CPI number which showed a big jump in the index of 0.4% in May from the April reading. That was the biggest rise since 2013. The index jumped 2.1% from a year earlier and that in particular is what caught the attention of some traders since it would indicate that the Fed's goal of an inflation rate at 2% has been reached. The YoY data brought in some buying to push the gold market back above some initial support at the $1260 level.

There was also a headline on another news site detailing the sharp rise in meat prices which are at an all time high. This should come as no surprise to readers here at this site since I have been remarking about high protein prices for some time now due to the fundamentals that currently exist in the cattle and hog markets.

However, and I think this is important to note - I expect meat prices to begin falling off in the 4th quarter of this year and especially by Q01 2015. I have been warning hog producers in particular to get some downside hedge coverage in those hog contracts in which they have expected production coming while they also secured feed coverage.

I am hopeful some of the hog producers who read this site did just that. Q04  2014 and Q01 2015 hogs have plummeted over the last two days.

What I am saying here is that readers ( and grocery shoppers) should expect to see continued high meat prices for this summer and into the fall but as winter rolls around, meat prices will come down.

Combine this with the fact that the price of all three major grains/oilseeds, wheat, corn and soybeans, are also dropping off sharply now due to traders expecting large harvests this year, and consumers are going to catch a most welcome break in food costs later this year. In that regards, while the CPI numbers are important to note, that index is backward looking by its design and not very good for anticipating what is coming further down the road.

When it comes to the energy component of the CPI, one wonders how much of the move higher is due to geopolitical concerns. Remember that crude caught its first bid higher due to events in Ukraine as traders put in geopolitical risk premium into its price. Now, within the last week, the Iraq events have taken the place of that Ukraine risk premium which was bled out.

Further complicating the energy picture is the demand side of this equation. We keep getting drawdowns or less than expected builds in the EIA data. I have mentioned this previously that I like to monitor both crude oil and copper prices to get a better sense of trader sentiment towards the economy.

Here is my quandary ( and I think that of other traders/investors as well). Is the strength on the demand side of the crude oil market related to actual crude usage that would indicate a stronger and growing economy? If so, then copper prices would tend to confirm that by moving higher. The problem is copper prices have been retreating and while stable above the $3.00 mark, they do not seem to be moving up with any great sustained momentum.

In other words, like so much of the current economic data, that which we are getting is cloudy and difficult to decipher. Strong crude oil usage is not indicative of an economy barely muddling along; then why are some of the other indicators weak?

The one constant has been a rather mediocre rate of job growth and that slack in the labor markets is the one thing that has been keeping the Velocity of Money from moving higher.

I said all the above to say this, traders are going to be watching very closely for any signs of Fed movement on the interest rate front. If they get the sense that the hawks are winning the argument at the FOMC, markets are going to get nervous.

I am also noticing that the CPI number actually put a very firm bid in the US Dollar as the number spooked Dollar bears. Traders do not want to get too aggressive ahead of the FOMC release preferring instead to wait and look at the comments but the big jump in the CPI has more and more traders thinking that perhaps the Fed has gotten behind the curve when it comes to raising interest rates. That number will certainly embolden the hawks at the Fed and could very well be the kicker to take the Dollar through overhead chart resistance.

Either way, this is friendly towards the Dollar with its main competitors unable to move interest rates higher due to the lack of inflationary pressures being seen in their respective economies. I am speaking mainly of the Eurozone and  Japan. Depending on what we get out of that FOMC meeting, we could very well see a sharp move in the Dollar. STay tuned on that front.

Switching briefly to grains due to time constraints once again - all of them are weaker today with old crop beans leading the move lower. At this point, it does not appear we are going to get a squeeze in that July contract but we are not yet there for the delivery period so I want to reserve final judgment until we get into the actual process.

I am also noticing the Australian Dollar, the "Aussie", has once again failed to extend past the top of its 6 week trading range near the 94 level. It has subsequently retreated and is now below the midpoint of that same trading range. The Aussie tends to be a decent, not always perfect, but a decent indicator of the overall strength of lack thereof in the commodity complex because of the nature of its export-dependent economy where a substantial portion of those exports are raw materials.

So far it has not given evidence of an upside breakout but we will want to keep one eye on its price action. Like so many other markets out there, it is rangebound.