Perspective: Morning Commentary, 01/28/2016

Thursday, January 28, 2016

January 28 – The U.S. Federal Reserve acknowledged the late-2015 economic slowdown in its policy statement released Wednesday afternoon, sounding a more dovish tone. It left the door open for a rate hike at its March meeting, but the markets clearly sensed that policy makers had lost confidence in their plan to boost rates four more times in the current calendar year. The statement acknowledged concerns about both U.S. and global economic trends. Trading in the Fed Funds market suggests that the market doesn’t see another rate hike until July or September, and that one more rate hike may be all that we get this year.

Perhaps the most concerning to Wall Street was the removal of comments in the statement that their views on the nation’s economy were “balanced.” In other words, Wall Street interpreted that as indicating that the Fed really has little consensus on the direction of the economy, creating increased uncertainty in the market. Stocks fell following the statement release, with the Dow Jones Industrial Average sitting just above chart support.

This morning’s data release backs up concerns held by the market, and perhaps now by the Fed. Durable goods orders slid 5.1% in December, falling short of Wall Street expectations of 0.2% gains and steady orders the previous month. The big drop was a product of a 12.4% decline in transportation orders, versus expectations of a 1.5% decline. Yet, orders still fell 1.2% removing transportation orders, with core-capital goods orders falling 4.3%.

Focus now shifts to pending home sales data to be released at 10 a.m. EST this morning, followed by tomorrow morning’s first estimate of fourth-quarter 2015 GDP growth. Pending home sales are expected to be up 0.8% for December, versus a 0.9% decline the previous month. Fourth quarter GDP growth is expected to come in at 0.9%, down from 2.0% in the third quarter. The United Kingdom reported this morning that its economy grew at a 0.5% pace in the fourth quarter, driven by strength in its services sector, which accounts for 79% of GDP there.

The dollar is weaker this morning amid ideas that the Fed will slow monetary tightening, with losses thus far limited by ideas that much of the rest of the world is poised to step up monetary easing. Yet, the dollar index finds itself testing channel support that has held the market for much of the past two months.

As a result, money is flowing back into the broader commodity sector this morning, led by roughly 4% gains in crude oil. Gains in crude oil have been impressive since the flush bottom of January 20, leading to short-covering and bottom-picking buying across much of the commodity sector. These bottom-picking efforts tend to increase at lower price levels. Confidence grows to extend coverage the closer to zero an asset comes. Traders took note that crude oil reversed higher Wednesday following a bearish stocks report that showed crude oil supplies at their highest level ever. Rallies on bearish news make bears quite nervous.

Fundamentally, grain and oilseed supplies are ample. Yet, demand for these commodities remains strong enough to suggest that those supplies could decline if the transition from an El Nino to a La Nina pattern would result in adverse weather in any major-producing area of the world. The market lacks fundamental data to sustain a rally at this point, but selling pressure has eased amid the above concerns until more is known. Near-term, Brazil weather is expected to improve next week, with dry areas of Argentina looking for a significant improvement in the weather pattern starting in the 11- to 15-day period and beyond. Yet, grain traders will be keeping a close eye on the crude oil market, seeing it as an indicator of sentiment toward the broader commodity sector.

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