Perspective: Morning Commentary, 01/27/2016

Wednesday, January 27, 2016

Today is Fed Day in the markets as traders anticipate this afternoon’s 2 p.m. CST release of the Federal Reserve’s revised monetary policy statement. No change in policy is expected at this meeting, which is as it should be at this meeting. However, global traders will be parsing words in the statement to discern any change in sentiment among the voting members after they made it clear in December that they would like to raise rates four times during the current calendar year.

Meanwhile, the European Central Bank continues to allow expectations to build once again that it will soon expand stimulus, while the Bank of Japan is expected to do the same. Yet, Fed fund futures trade suggests that the markets expect the Federal Reserve to raise rates once more this year (not four times). Nonetheless, U.S. central bank policy is still moving in the opposite direction of much of the rest of the world, suggesting longer-term support for the dollar.

This week’s data provides yet more mixed messages. Friday’s initial estimate of fourth quarter GDP is expected to show a mere 0.9% growth as the economy stagnates. Yet, Tuesday’s Case-Shiller report showed a 0.9% rise in its 20-city home price index in November, up from 0.8% the previous month and up from Wall Street expectations of 0.7%. Furthermore, the consumer confidence index came in at 98.1, up from 96.5 the previous month and above expectations of 96.3. Wall Street took note of the increased consumer confidence, as our economy is consumer-driven. Other data showed that the service sector is on a solid, albeit slow growth path.

We should note that many have had their eyes on the World Economic Forum in Davos this week. Those in attendance note that the mood among those world financial leaders in attendance is quite somber; perhaps more somber than it has been since 2009. World financial leaders are truly concerned about weakness in the global economy, focused on weak commodity prices led by crude oil, poor market liquidity and the refugee crisis in Europe. The latter has received little attention in the financial markets here, but is proving to be a drag on the European economy at a critical time.

Reports from Davos suggest increasing concerns about the inability of central banks to effectively pull their respective economies out of the doldrums. In fact, they see the “side-effects” of central bank activism increasing even as the impact of that activity declines. That has many world financial leaders worried about the future of the global economy. That would appear to be quite bearish the commodity sector at face value, but keep in mind that commodity prices are already at long-term lows. I’m not trying to paint a bullish picture for the commodity sector, but at some point the market decides that the bearishness has already been priced in and money managers beginning looking for other sectors to be short.

In commodity news, reports out of Russia today indicate that it is considering lifting its export tax on wheat; taking quite the opposite approach from rumors earlier in the week of export restrictions. Yet, it is considering export tariffs on corn and barley to appease the livestock sector. Furthermore, Chinese officials committed to implementing new development concepts to increase the pace of modernization of its agricultural sector. It commits to increasing rural prosperity this year, which is the area from which it most fears social unrest. Recent rhetoric would suggest increased subsidies to accompany free-market reforms that reduce prices. China needs to reduce the costs of its expensive grain reserve program, while pumping more money into its rural population. The bottom-line is likely reduced feed grain imports, increased ethanol production and expansion of the pork and poultry industry in the year ahead.

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