Perspective: Morning Commentary, 11/13/2015

Friday, November 13, 2015

Euro-area gross domestic product grew at just 0.3% in the third quarter, down from 0.4% in the second quarter. The data boosted the argument in the markets for the European Central Bank to increase its current stimulus program. ECB Chair Mario Draghi stated earlier this week that they were prepared to do just that at their December meeting. Economic growth met expectations in France and Germany, but fell short in Italy, the Netherlands and Portugal.
Increased stimulus in Europe at a time when the U.S. Federal Reserve appears to be moving toward monetary tightening suggests increased risks for a stronger dollar and weaker euro; something that doesn’t favor the outlook for commodities. The Ag commodities that are most sensitive to this scenario would be wheat and beef, although most are impacted to some extent.

Thursday’s comments highlighted the fact that Fed Chair Janet Yellen and five other members of the central bank were on the speaking docket during the day. The market parsed words trying to determine whether the board is moving closer toward agreement on a rate hike. The sense on Wall Street once all the speeches were complete was that Fed members are trying to move the conversation past the decision on whether to tighten and on to a discussion about the pace of tightening. That suggests that a rate hike is anticipated at the December meeting if nothing happens between now and then to change things.

Retail sales data disappointed today. October sales grew at a slow 0.1% pace, up from a downwardly revised September at 0.0% growth and down from the average pre-report estimate of 0.3% growth. Sales minus autos rose 0.2%, compared to expectations of 0.4% and -0.4% in September. Sales minus autos and gas rose 0.3%, matching the average pre-report estimate and above flat growth the previous month. The dollar initially dropped on the data release, but then rapidly recovered on ideas that this morning’s report probably was not enough to derail a Fed rate hike.
The data would suggest that people are driving less, which isn’t good for the energy markets. Crude oil turned lower on the data release. Crude continues to be a leading indicator for money flow either in or out of the broader commodity sector. We saw modest buying of the broader commodity indices early today, but that has turned to selling following the release of the retail sales data.

This morning’s USDA weekly export sales data for the week ending November 5 did little to change sentiment toward the commodity sector. Demand for the Ags remains sluggish across the board, with the exception of soybeans. Soybean sales have slowed dramatically in recent weeks, but still remain above the pace we’d expect for this time of year. Of greatest concern is this year’s sales pace to China. Sales to date to China total 238 million bushels, which is less than half the 513 million bushels sold to the world’s top importer at this point one year ago. Sales to “unknown destinations” to date total 235 million bushels, up from 196 million at this time last year.

The gap continues to close, but at a slower pace than seen a month ago. China had good incentive to buy aggressively last year, with U.S. stocks at record tight levels. In fact, they had been tight for several years, leading to China to aggressively buy the breaks early. Current-year sales to all destinations exceed the seasonal (10-year) pace needed to reach USDA’s target by 65 million bushels, which is up from 59 million the previous week. In the end, soybean demand is good, but needs to be monitored, while demand for corn, wheat, beef and pork are all feeling the pain of a strong dollar and ample competing supplies overseas.

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