Market Brief – Wednesday 2/20/19

U.S. equities and Treasury yields headed higher on hopes that today’s release of the January Federal Open Market Committee’s meeting notes will show a very dovish Fed, but equities and yields didn’t go too much higher. Since the Fed has not made any adjustments to their balance sheet unwind, outside of talking the stock market higher, it’s highly probably investors may be disappointed.

Japanese exports fell -8.4% YoY and -17.4% YoY with their exports to China. U.S. investors continue to ignore signs of slowing global growth, which will eventually make its way onto our shores.

In a scathing report, the USDA does not believe crop exports will rebound until 2026-27, which sent agricultural commodity prices lower in early trading. Buyers stepped back in a short while later. This sentiment was echoed by China, who said the U.S. stock market will fall if the Trump Administration enacts further tariffs. Cleary China gets it.

Soybean planting season begins in April and extends into May, so U.S. farmers have some time to battle the unexpected cold weather before deciding on what to plant. Farmers are also hoping for a resolution on the trade deal by then, which could help crop exports.

Crop prices and yields are not a function of Chinese demand, they fluctuate due to the solar cycles. About every eleven years the Sun goes into a cooler phase where it emits very few sunspots. When this happens, colder weather blankets the planet, where it destroys crops, reduces yields and makes planting difficult. The last solar minimum starting in 2007, which suggests the current solar minimum should have begun in 2018, and it has. It’s not a matter of if crop prices will take off, it’s just a matter of when the market realizes demand is greater than supply.

Those hoping for an early-year economic boom like last year are likely to be disappointed, as the stimulative tax cut of last year is now a drain on the economy. Further evidence of a slowing economy is in state tax receipts, which are trending below average for this time of the year and automobile sales, which fell 5% in January. As I mentioned in a prior update, we are likely to experience an earnings recession as inventory levels are high and demand is falling.

Wall Street was anxiously waiting the December FOMC meeting minutes, which even the Fed admits to rewriting before their release, to see if there was any indication to the end of the Fed’s balance sheet unwind. Various news outlets reported that the Fed was going to be ending their balance sheet unwind, but after reading through the minutes myself, I didn’t see any indication.

Almost all participants thought that it would be desirable to announce before too long a plan to stop reducing the Federal Reserve’s asset holdings later this year. Such an announcement would provide more certainty about the process for completing the normalization of the size of the Federal Reserve’s balance sheet.

The Fed believes they should have a plan in place by the end of the year as for when the balance sheet unwinds will stop. There was no other indication of when the balance sheet unwinds would stop, other than to say that if they needed to lower the Federal Funds rate, there would likely be an adjustment to the balance sheet unwind.

Stocks nudged higher after whipsawing around the FOMC announcement and Treasury yields closed slightly higher. Treasury yields are the key – they are leading the direction of equity prices lower.

As I expected, this rally in physical gold and the gold miners was too soon and without a catalyst. After the FOMC minutes, both fell. Buyers of agricultural commodities came in to buy the dip once again.

Oil and gas producers trading higher ahead of the API crude inventory report, which shows inventory levels as Crude: +3.2M Cushing: +800K Gasoline: -1.1M Distillates: -1.7M. Crude oil didn’t fluctuate much following the report. The official government report is due tomorrow morning.