Perspective: Morning Commentary, 12/02/2015

Wednesday, December 02, 2015


December 2 – We are just in day two of this pivotal month of December, but uncertainty is already heating up regarding our economic future. The December 16 Federal Reserve decision to raise interest rates for the first time since 2006 appeared to be in the books already, but that “certainty” is starting to unravel. This week’s economic data has been less than impressive. Chicago area manufacturing is contracting with new orders in decline amid emerging signs of pessimism. The national manufacturing index did not yet show contraction, but it did show that the industry is slowing. Pending home sales also came in at less than expected.


On the other hand, motor vehicle sales and construction spending came in better than expected. Consumer confidence has shown a few hiccups lately, but remains relatively good for this consumer-driven economy. This morning’s mortgage data showed that applications for home purchases rose 8% in the week ending November 27 after a pause the previous week. Mortgage rates actually leaked a bit lower, with a 30-year fixed rate down 2 basis points to 4.12%. Buyers appear to be jumping to buy before rates rise further. Purchase applications are up 30% year-on-year.
But will the Fed actually have the courage to initiate lift-off? The Fed has certainly set the expectations in the market that lift-off will occur, with a 25-basis point increase anticipated. Fed member Charles Evans is probably one of the more dovish members of the Fed, but he appeared willing to go along with a rate hike, at least until yesterday. His comments on Tuesday suggested that he may be reluctant to do so now. Fed Governor Brainard also appeared to have concerns.


That brings us to today, when several Fed members speak, including two appearances by Chair Janet Yellen. Her comments will be parsed closely for signs of shifting winds. The market has priced in expectations of a rate hike, setting the stage for profit taking if the foundations of that anticipated decision show signs of cracking.
Thus far this morning the dollar is stronger and commodities are weaker. The Fed has built a strong argument for a rate hike and the markets are still leaning in that direction. The broader commodity sector continues to languish near multi-year lows, slowly eroding lower like a slow drip of a faucet with little incentive for end users to step up coverage.


The bright spot in the commodity sector has been soybeans, followed by corn. The latter has been fairly resilient since the November USDA crop report break. That was the report that included the big unanticipated upward revision of Chinese stocks. However, the market has since realized that global stocks minus Chinese supplies are actually tightening somewhat. The world is comfortable with just-in-time supplies as long as no legitimate threat exists, but neither are traders excited about driving prices lower from current levels.


However, January soybeans are nearly 50 cents above their November 23rd low, led by a rebounding soyoil market. El Nino is expected to tighten palm oil supplies, with demand for soyoil rising. I would not call strength in soyoil a bull market, but increased demand from China and “unknown destinations” has certainly helped pull it off its lows and provide some renewed energy for the soybean market. Crop stress in South America is currently limited to roughly 10% of Brazil’s crop, but the heart of the growing season still lies before us. As such, traders are uncomfortable pushing the downside of the market at this point.


That said, Fed Chair Janet Yellen’s comments will be followed closely today. Traders will be watching for signs of weakened resolve after she has so effectively built expectations for one of the most anticipated rate hikes in history.


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