Perspective: Morning Commentary, 02/10/2016

Wednesday, February 10, 2016


February 10 – Federal Reserve Chair Janet Yellen tops the headlines today as she prepares to address Congress. Yellen appears before the House Financial Services Committee today, prior to taking questions from the Senate Banking Committee tomorrow. Many on Wall Street would like to see a rate cut from the Federal Reserve, which just provided us our first hike since 2006 in January. The Fed had been pushing for four rate hikes this year, but the market has since discounted that possibility and is again looking at the possibility of a cut. They’ll not likely get such a cut anytime soon, but they’ll be listening for words emerging from Yellen that might hint at the possibility of such, with potential implications for the currency, stock and commodity markets.


Yellen’s prepared comments released at 8:30 a.m. EST this morning suggest that she will give a more cautious outlook on the economy when she addresses Congress, but still support moving forward with gradual interest rate hikes. She admits in the comments that financial conditions are “less supportive to growth,” indicating that these conditions could weigh on the economy if they persist. She also acknowledges some risks emerging from uncertainty over the Chinese economy.


Yet, Yellen indicates that the U.S. economy could still manage moderate growth and could still “exceed our projections.” She points to low longer-term interest rates and low energy prices as potential stimulants for the economy, although her prepared comments do not appear to address the central bank’s forecast in December of four rates hikes this year.


The dollar was initially weaker following the release of Yellen’s comments, with crude oil wiping out its modest gains. The dollar has since found renewed energy. Traders will now look ahead to the answers she provides to questions from Congress. The dollar’s fundamentals remain good relative to its major competitors. Yet, the charts suggest that buyers be ware in the near-term, largely due to the ongoing unwinding of yen/equity trades that continue to support the yen. Commodity trade suggests expectations that the dollar will be strong again at some point, but those trying to pick a bottom in this liquidation phase remain at considerable risk.


We saw follow-through selling of stocks in Asia overnight, with Japan’s Nikkei 500 down another 2.6%. Yet, European markets were generally positive, with U.S. stock futures pointing toward a higher open ahead of Yellen’s comments. Futures pared their gains modestly following the release of Yellen’s prepared comments this morning. European stocks were led higher by the banking sector, with buying spurred by rumors that Deutsche Bank will consider a bond buyback program to ease investor concerns.


Crude oil prices bounced modestly overnight, but considerable damage was done Tuesday when prices for West Texas Intermediate fell below chart support at $29.25 per barrel, with damage to both the charts and to market sentiment. Crude oil remains a leading indicator on market sentiment toward the broader global economy. That in turn impacts markets sentiment toward the broader commodity sector. That bearish sentiment is reflected in increased demand for government securities. The U.S. Treasury is expected to auction $23 billion in 10-year notes today, with yields currently near three-year lows. The Fed may not be lowering rates, but the market is doing just that.
The message emanating from Tuesday’s USDA crop report was that supplies are adequate, demand is soft and the market is telling producers to pare their acreage this spring. Yet, those crops will be planted, with acres of both likely expanding. Yet, inputs will likely be pared back due to low prices and tight credit. Even so, weather will remain the largest factor shaping the markets this year, with overall global stocks still including relatively small safety margins should a problem emerge. That remains the question.


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