Reports on Inflation Obscure Certainty for September Rate Hike
Several recently reported economic metrics from the US served to stir up doubt among members of the Federal Open Market Committee regarding an increase in interest rates for September. The statistic most present in the minds of Fed members is the weakness seen in inflation.
While some members have remained staunchly in favor of a rate hike in September, most have not changed their stances despite the economic figures that have turned their peers to the hawkish side. Discord is the theme this week as members who argue that the US is ready for increased rates are met by those who believe that conditions for a liftoff are still not present. While the labor market has seen very slight improvements, reports from yesterday’s session indicate that languishing core inflation may be a problem too prevalent to ignore. It is anticipated that buoying energy prices in the latter half of the year may push the stubborn inflation numbers upwards, but there is high risk in dismissing inflation and carrying on with the September hike. The likelihood for a launch at this target drops significantly and December is now seen as a more probable date. The dollar took a steep fall but recovered somewhat, gaining half the ground lost versus JPY.
Many emerging markets are still feeling the pain of a devalued Yuan in China. Most notably, the Vietnamese Dong was devalued for the third time this year and the Tenge in Kazahkstan dropped more than 23%. The Asian area economies in particular is adversely affected by the late move from the Chinese, most of which seek to stay competitive in a time when market activity is stalling and confidence in regional markets is at an all-time low. Policymakers draw similarities to the Asian currency crisis of the 1990s, as the Shanghai Composite is trends down towards the 3500 support level where the Chinese government has, in the recent past, stepped in to apply intervention measures. The Lira is also sitting at all-time lows, and the Ruble is firmly in the shadow of the US dollar, falling to February levels versus its peer.
The Yuan has also affected heavily distressed the commodities market. Copper and other industrial metals have been in a tough spot recently, and crude oil saw a drop further on the back of the latest Department of Energy report announcing a surprising rise in inventory. Demand cannot seem to catch up to the rapidly growing supply present in the sector, with the latest expected drawdown of -0.777 million barrels being eclipsed by real numbers showing an addition of 2.620 million. Even as US production falls to 9.348 million barrels per week, introductions to supply coming from OPEC and non-OPEC members rise exponentially in comparison. Yesterday’s oil prices were the lowest since 2009, seeing Brent and WTI figures sliding over a point each. Brent in particular currently sits at levels unseen since January of this year.
Corn Upward Channel Trading Opportunity
Following the weakness in base metals and energy prices, agricultural companies are also feeling the pinch after a recent selloff saw the asset class tumble. In particular, a selloff event hit many of the core staples including wheat and corn. Expectations of better weather combined with forecasts of rising crop yields have dented prices further, adding to the weakness in the benchmarks. Corn prices have recovered modestly after crashing lower in the prior week, trending higher in an upward channel pattern. The emerging setup has a bullish bias with ideal positions taken at the lower channel line targeting the upper channel line as an exit for long positions. Fighting the near-term uptrend is not suggested owing to the diminished potential reward and higher risks.