Wednesday afternoon’s release of the October Fed meeting minutes was quite revealing in more than one way. First, it revealed that the majority of the voting members believed that conditions to justify a rate hike “could well be met by the time of the next meeting.” In fact, the minutes indicated that some members felt those conditions had already been met. Keep in mind that the October meeting took place prior to the bullish October jobs report released on November 6 that increased the chances for a December rate hike. As such, the market now fully anticipates a rate hike on December 16; likely of 25 basis points.
The other factor revealed was the lack of panic by the markets. I’ve been saying for some time that we need to get the first small rate hike in place so that young fund managers who have never seen one ( the last was in 2006) would see that the sun would still come up the next morning. The overall reaction of the global markets to the meeting minutes suggests that the trade has come to both anticipate and accept the rate hike. Stocks are stable and the dollar is weaker. That’s largely because the market has also come to anticipate that this rate hike will be small, with the second rate hike likely some time down the road.
Meanwhile, a rate cut in China receives relatively little attention from the markets, which have accepted the fact that China’s economy is slowing, necessitating more stimulus. Once again, the United States is moving towards monetary tightening, while the rest of the world is essentially in stimulus mode. However, U.S. tightening is expected to be modest at most due to the fact that our economic growth is less than spectacular and Fed members remain concerned about the lack of growth overseas.
As such, commodities continue to face head winds. Asian iron ore contracts hit new record lows on demand concerns, while nickel posted a 12-year low on weaker demand from China. Some bears argue that the commodity markets have not yet priced a Fed rate hike in, but that suggests that commodity traders have been living in a bubble.
Crude oil slipped below $40 per barrel overnight, its lowest level since late August. Prices are currently back above $40, but the charts remain weak. Crude oil continues to be a leading indicator for the broader commodity indices. Those indices are consolidating early today after some posted new multi-year lows on Wednesday.
The grains are faring a bit better than the broader commodity complex. That makes sense, since the poor will spend their last “dollar” on food. They may move down the food quality scale, but they will still do all they can to eat. Wheat fell to new lows for the move on Wednesday, but corn and soybeans held above recent lows and continue to consolidate, resisting selling in the broader commodity markets for now.
Support comes from strength in cash basis for corn and soybeans. Processors continue to push bids in most areas to pull grain out of the hands of farmers. Producers don’t like current flat prices and still have enough money in the bank at this point to keep the lock on the bin door, hoping that a weather problem will emerge overseas to re-energize the markets. This morning’s USDA export sales data for the week ending November 12 was encouraging, with good sales across the board for the grain and oilseed complex. However, that demand has been relatively price sensitive this year, suggesting that buyers aren’t willing to chase a rally.
Weather remains largely favorable, lacking fodder for the bulls. Wheat received good moisture in both the U.S. Plains and Former Soviet Union, and now looks to go dormant over the coming week as cooler temperatures settle in. A cold push in China next week will result in only isolated damage. Widespread rains across Brazil should support crop development.
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