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What's Up at the US Fed?

Barchart - Wed Mar 22, 11:13AM CDT
  • The US Federal Reserve is expected to raise the Fed fund rate another 25-basis points Wednesday afternoon, a move that would not change the long-term business cycle.
  • Additionally, long-term trends of bonds, stocks, and commodities are not expected to change this month either.
  • However, another financial quarter down the road and the US could be looking at the Fed switching to a strategy of lower rates.

One of the more popular questions of late has been, “What effect will the latest US Federal Reserve decision on interest rates have on commodity markets?” It’s a broad question and brings us back to my previous discussions on the economic cycle in general. A quick recap of a cycle shows: 

  • Bonds turn up (stocks and commodities falling)
  • Stocks turn up (bonds rising, commodities falling)
  • Commodities turn up (all three markets rising)
  • Bonds turn down (stocks and commodities rising)
  • Stocks turn down (bonds dropping, commodities rising)
  • Commodities turn down (all three markets dropping)

If we were to view this as a mall map, where would the “You are here” sticker be located? Based on my analysis of long-term monthly charts: 

  • US 30-year T-bond futures (ZBM23) are in a long-term uptrend dating back to last November’s bullish 2-month reversal pattern.
  • The S&P 500 index ($INX) is in a long-term uptrend dating back to its bullish spike reversal from last October.
  •  At least two of the Three Kings of Commodities continue to show long-term downtrends, with gold (GCY00) the outlier at this time. 

This puts the cycle between points two and three, waiting for an upturn in commodities. When it comes to these long-term trends we need to keep Newsom’s Rule #1 in mind: Don’t get crossways with the trend. This is my variation on Newton’s First Law of Motion applied to markets: A trending market will stay in that trend until acted upon by an outside force, with that outside force usually noncommercial activity. A look at the CFTC Commitments of Traders reports (legacy, futures only) confirms what we already knew about the noncommercial side: It has been selling heavily for a number of weeks and/or months. 

The most recent update, for the week ending Tuesday, March 14, showed the WTI crude oil net-long futures position decreased to roughly 176,200 contracts, down 30,700 contracts from the previous week and the smallest net-long futures position in WTI since the week of February 16, 2016. Meanwhile, the same group’s net-long futures position in corn was cut to 43,800 contracts, down 59,500 contracts for the week and the smallest since a net-short futures position of 17,400 contracts the week of August 25, 2020. Why have funds been liquidating long futures so aggressively in these two key commodity markets, as well as many others? The famed 4-letter word: Fear. The jury is still out on how dangerous the latest global banking fiasco is but we could see well in advance something had investment traders around the world spooked by simply watching trends (price direction over time) and waiting for confirmation of our analysis from CFTC. 

But what about Wednesday afternoon’s announcement? The Fed fund futures forward curve (always fun to say) is showing the US Federal Reserve is expected to raise interest rates through June 2023, then start to back down again. While there are outlier voices calling for lower interest rates this month, and some others thinking it will be a 50-basis point increase, the general consensus seems comfortable with a 25-basis point hike. 

A look at the daily chart for the US dollar index shows the greenback is in position for a bullish short-term reversal, having done enough to complete a 3-wave downtrend pattern. But this doesn’t change the fact the dollar’s long-term trend remains down while US T-bonds are still trending up. Eventually, the weaker dollar could pull fund money back into commodities, meaning we need to keep a close eye on all the monthly charts as the end of March approaches next week. That should make for a lot of fun next Friday: The end of the week, month, and financial quarter.

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On the date of publication, Darin Newsom did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.

Provided Content: Content provided by Barchart. The Globe and Mail was not involved, and material was not reviewed prior to publication.