Perspective: Morning Commentary, 02/01/2016

Monday, February 01, 2016


February 1 – Today is the day when a number of countries report their Purchasing Managers Index for manufacturing. U.S. data is due to be released starting at 9:45 EST, while data overseas thus far has been less than impressive, particularly in China. Commodity prices came under pressure, while China led many stock markets lower, after the Chinese PMI declined for the sixth consecutive month, falling to a three-year low. China’s stocks general lost 1 to 2% overnight, extending losses that saw values fall 23% in January.


This morning’s U.S. personal income and outlay data showed that consumers saw a 0.3% rise in income in December, matching Wall Street expectations. However, they were reticent to spend the increased revenues amid concerns about the economy. The savings rate pushed to 5.5%, up from 5.3% previously and its highest level in three years. As such, spending on both durable and non-durable goods each fell by 0.9%.


The PCE index, which the Fed loves to follow, showed contraction of 0.1% from the previous month, while up 0.6% year-on-year. That tells the Fed that inflation continues to be well-below its objective. However, the core PCE index that removes food and energy actually crept upward to 1.4%, up from 1.3% the previous month. As such, the data provides a mixed message for the Fed that appears to be placing increased emphasis on trying to target an inflation rate near 2%.


The world continues to ponder Japan’s actions on Friday, when it moved to negative interest rates just days after making statements that such a move would be extreme. As such, the focus today shifts back to U.S. Fed Vice-Chair Stanley Fischer, who is scheduled to speak at 1 p.m. EST. Fischer suggested a couple of weeks ago that another four rate hikes would be appropriate for the United States this year. Will he too reverse his stance, or will he hold to the sentiment of his previous comments?


The U.S. dollar probed bearishly below the bottom of a channel on the charts that had largely held the greenback since early December on Thursday. However, Japan’s move to negative interest rates made the dollar the attractive once again, sending it to its highest level since December 2. Profit taking has returned to pressure the dollar this morning, fueled by disappointing global manufacturing data released to this point.


The broader commodity sector remains under pressure this morning, led by crude oil. Declining manufacturing activity in China and elsewhere is expected to translate into lower demand for the raw commodities needed by processors. That’s not necessarily true for the food-based commodities, but they currently lack a compelling story to set them apart from the rest.


We continue to monitor dryness in Argentina, where roughly 20% of the crops remain under stress, although that is currently mitigated somewhat by the lack of heat. Little relief is expected this week, although better model consensus is in place this morning for relief in the 6- to 10-day period that could cut the area of concern in half. Rains are expected to shift south in Brazil this week, returning north in the 11- to 15-day period, although harvest activity is expected to see only limited delays.


Friday’s U.S. cattle inventory report held several surprises with longer-term implications for meat prices, as well as the grains sector. Expansion in both the beef and dairy herds was much more than anticipated, suggesting increased dairy and meat supplies down the road, as well as demand for the feed grains needed to support their production. Cheap feed prices stimulate demand, with similar dynamics occurring in the hog sector as well.


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