November 30 – The calendar still says November, but it feels a lot like December; both with the weather and the economic calendar. It was a cold icy holiday weekend across the nation’s mid-section, with the northwestern Midwest bracing for a winter storm this week. Economically, the next several weeks provide plenty of fodder for the markets to trade with significant long-term implications.
First up, the International Monetary Fund should announce today whether it will give China’s currency Special Drawing Rights, which would give it added credibility as a global currency of trade. It is widely expected that the IMF will grant approval, but it’s not a sure deal yet at this point. Even so, a number of analysts continue to expect another devaluation of the yuan in the near future to stimulate growth at home, which again would provide additional strength for the dollar.
Next up is the European Central Bank meeting on Thursday. The ECB is expected to take steps to expand its already large asset purchasing program. Considerable rhetoric from ECB members in recent weeks supports the notion that expansion will take place, which could keep pressure on the euro, providing support for the dollar. However, this decision too will receive some scrutiny, as economic data out of Europe has improved in some sectors in recent weeks.
There’s a plethora of U.S. economic data scheduled to be released this week, but none as important as Friday’s November jobs report. Wall Street expects the data to show that 190,000 non-farm jobs were created during the month, down from 271,000 the previous month. The unemployment rate is expected to remain unchanged at 5.0%, with average hourly earnings expected to be up 0.2% from the previous month. Those are not the numbers one would expect from a robust economy, but they are expected to be good enough for the Federal Reserve to move forward with its first rate hike since 2006.
The Fed meets to discuss monetary policy December 15 & 16, a policy statement and press conference are scheduled for early afternoon on the 16th. The Fed Fund futures market currently has priced in roughly 75% odds that the central bank will indeed raise rates on December 16, but additional rate hikes are expected to be slow in coming as the U.S. economy still remains sluggish at best.
The anticipated rate hike comes amid a world still focused on monetary easing, making our rates among the highest in the world. That continues to suggest support for the dollar longer-term, providing ongoing head winds for the broader commodity sector. The dollar is modestly higher at new eight-month highs this morning, but the greenback remains just below the March highest yet at this hour. Crude oil was under pressure earlier today, but is now back in positive territory as the dollar comes off its session highs. That in turn is providing modest support for the broader commodity sector. The major commodity indices continue to consolidate near their recent multi-year lows; some going back to 2002.
Commodities have value at current levels. As a result, we continue to see periodic buying of the sector, but headwinds from the dollar and sluggish global economy has thus far kept buying limited. End users still have little incentive to extend coverage. Individual commodities can sustain a rally in such an environment if presented with a compelling story, but thus far that doesn’t exist. As such, the major funds continue to short the commodity sector. As they say in the market, “the trend is your friend,” and the current trend remains lower.
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