Debt-ceiling deniers prompt some investors to take cover in the event of disaster The stock market received a temporary reprieve after Re- publicans offered a 6-week debt ceiling increase. However, that would not stave off impending doom for long. The mar- kets remain concerned about the comments from debt-ceiling deniers who insist that a default would not be a big deal. The confusion on the debt ceiling is caused in part by the definition of “default.” If the U.S. Treasury misses some of its payments, that could be considered a “default” in a broad definition of the word because the Treasury would be default- ing on financial obligations that it has agreed to pay. However, the term “default” should really be reserved for the case of a “sovereign debt default” where the Treasury misses a payment on interest or principal on the Treasury securities that it has sold. A sovereign debt default would indeed be a catastrophe. Most debt-ceiling deniers are making the point that the Treasury when it runs out of debt ceiling room will have to get along solely on incoming tax revenues and that there is more than enough tax revenue to pay interest on Treasury debt (the Treasury can roll-over the principal payments on maturing debt and remain under the debt limit, assuming anyone wants to buy Treasury debt under those circumstances). That leads to their conclusion that the Treasury will not be forced into a sovereign default even if the debt ceiling is not raised. They argue that the Treasury will simply have to go cold-turkey on slashing government expenses to meet available tax revenue. However, the debt ceiling deniers are missing several points. First, there is no way that the U.S. government could slash its expenses fast enough to stay within the bounds of incoming tax revenues. That means the Treasury will be miss- ing payments for something. Second, the Treasury as of Oct 17 will only have $30 billion in cash, which is not enough of a cash buffer to avoid missing payments. Indeed, the CBO has said that the Treasury will start missing payments sometime between Oct 22 and Nov 1. Third, if the Treasury starts miss- ing payments on major items such as government employee pay, Medicare, Social Security, etc., the markets will assume that there is a much bigger chance that the Treasury could miss an interest payment as well. Fourth, the Treasury says it has no legal authority or procedural ability to prioritize payments. If that is true, then the Treasury will eventually default on its debt since it cannot be prioritized. The Treasury can probably sneak past an interest payment of $5.8 billion on Oct 31, but not the $30 billion interest payment on Nov 15. The Treasury has said its debt ceiling room will run out on Oct 17 and that it will have about $30 billion of cash on that day. However, the actual drop-dead date for a debt ceiling hike is probably Oct 31 or Nov 1, when the Treasury will start missing payments. As the days tick by without a debt ceiling increase, the markets can only become more alarmed. Fidelity has already dumped all of its short-term T-bills due to default risk. More investors will take cover if the crisis grinds on. -8% -6% -4% -2% 0% 2% 4% 6% 8% E-Mini S&Ps 10yr T-notes Dollar Index EUR/USD USD/JPY Crude Oil Gasoline Gold Silver Copper Corn Soybeans Wheat Live Cattle Lean Hogs Cotton Coffee Sugar Cocoa Top Markets - 1-Week Change -8% -6% -4% -2% 0% 2% 4% 6% 8% E-Mini S&Ps 10yr T-notes Dollar Index EUR/USD USD/JPY Crude Oil Gasoline Gold Silver Copper Corn Soybeans Wheat Live Cattle Lean Hogs Cotton Coffee Sugar Cocoa Top Markets - 1-Month Change VOL. 80, No. 40 Oct 11, 2013
Transcript
Debt-ceiling deniers prompt some investors to take cover in the event of disasterThe stock market received a temporary reprieve after Re-
publicans offered a 6-week debt ceiling increase. However, that would not stave off impending doom for long. The mar-kets remain concerned about the comments from debt-ceiling deniers who insist that a default would not be a big deal.
The confusion on the debt ceiling is caused in part by the definition of “default.” If the U.S. Treasury misses some of its payments, that could be considered a “default” in a broad definition of the word because the Treasury would be default-ing on financial obligations that it has agreed to pay. However, the term “default” should really be reserved for the case of a “sovereign debt default” where the Treasury misses a payment on interest or principal on the Treasury securities that it has sold. A sovereign debt default would indeed be a catastrophe.
Most debt-ceiling deniers are making the point that the Treasury when it runs out of debt ceiling room will have to get along solely on incoming tax revenues and that there is more than enough tax revenue to pay interest on Treasury debt (the Treasury can roll-over the principal payments on maturing debt and remain under the debt limit, assuming anyone wants to buy Treasury debt under those circumstances). That leads to their conclusion that the Treasury will not be forced into a sovereign default even if the debt ceiling is not raised. They argue that the Treasury will simply have to go cold-turkey on slashing government expenses to meet available tax revenue.
However, the debt ceiling deniers are missing several points. First, there is no way that the U.S. government could slash its expenses fast enough to stay within the bounds of incoming tax revenues. That means the Treasury will be miss-ing payments for something. Second, the Treasury as of Oct 17 will only have $30 billion in cash, which is not enough of a cash buffer to avoid missing payments. Indeed, the CBO has said that the Treasury will start missing payments sometime between Oct 22 and Nov 1. Third, if the Treasury starts miss-ing payments on major items such as government employee pay, Medicare, Social Security, etc., the markets will assume that there is a much bigger chance that the Treasury could miss an interest payment as well. Fourth, the Treasury says it has no legal authority or procedural ability to prioritize payments. If that is true, then the Treasury will eventually default on its debt since it cannot be prioritized. The Treasury can probably sneak past an interest payment of $5.8 billion on Oct 31, but not the $30 billion interest payment on Nov 15.
The Treasury has said its debt ceiling room will run out on Oct 17 and that it will have about $30 billion of cash on that day. However, the actual drop-dead date for a debt ceiling hike is probably Oct 31 or Nov 1, when the Treasury will start missing payments. As the days tick by without a debt ceiling increase, the markets can only become more alarmed. Fidelity has already dumped all of its short-term T-bills due to default risk. More investors will take cover if the crisis grinds on.
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E-Mini S&Ps10yr T-notesDollar Index
EUR/USDUSD/JPY
Crude OilGasoline
GoldSilver
CopperCorn
SoybeansWheat
Live CattleLean Hogs
CottonCoffeeSugarCocoa
Top Markets - 1-Week Change
-8% -6% -4% -2% 0% 2% 4% 6% 8%
E-Mini S&Ps10yr T-notesDollar Index
EUR/USDUSD/JPY
Crude OilGasoline
GoldSilver
CopperCorn
SoybeansWheat
Live CattleLean Hogs
CottonCoffeeSugarCocoa
Top Markets - 1-Month Change
VOL. 80, No. 40 Oct 11, 2013
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S&P 500 vs VIX Volatility Index
S&P 500 Index
VIX
E-MINI S&P 500 STOCK INDEXThe S&P 500 plunged to a 1-month low Wednesday as the dysfunction in Washington dragged on for a second week, but stocks moved sharply higher Thursday on signs that U.S. lawmakers could reach an agreement to increase the debt ceiling. With no fresh U.S. economic data to focus on because of the government shutdown, the markets have been forced to watch the political infighting in Washington for clues as to when law-makers will pass a CR and raise the debt limit. Also supporting stock prices was the action by President Obama to nominate Janet Yellen as the next Fed Chair, which fueled speculation the Fed will maintain its highly stimulative monetary policies and be in no rush to end QE3. Stocks had been under pressure early in the week on concern the U.S. government shutdown will start to slow economic growth and after the IMF cut its 2013 global growth outlook to 2.9% from a July estimate of 3.1% and cut its 2014 global GDP outlook to 3.6% from July’s projection of 3.8%.
Fundamental Outlook— Short-Term Neutral—The S&P 500 recov-ered sharply from Wednesday’s 1-month low on optimism U.S. lawmak-ers may agree on a debt ceiling increase. Stock prices still have the support from (1) the Fed’s action to maintain QE3 and the nomination of dove Janet Yellen to become the new Fed Chair, (2) underlying strength in the U.S. economy, (3) improved global economic data, and (4) ex-traordinarily easy monetary policies in G-7 countries. Bearish factors include (1) the U.S. fiscal headwind from the sequester along with the ongoing political wrangling over a CR and a debt ceiling hike, and (2) moderately-high valuation levels with the forward P/E of 15.1 (vs 5-yr avg of 13.9 and 10-yr avg of 14.9).
US 10-YEAR T-NOTESDec 10-year T-note futures slipped to a 2-week low on reduced safe-haven demand fueled by the reports that House Republicans offered a 6-week debt ceiling extension. T-note prices were also undercut from the Sep 17-18 FOMC minutes in which Fed members said they expected to start tapering bond purchases this year and ending the QE3 program altogether in mid-2014. Comments from Cleveland Fed President Pian-alto seemed to cement that view when she said she favored a reduction in bond buying at last month’s FOMC meeting as “the improvement in labor markets seemed substantial enough to support a scaling back of the asset-purchase program.” T-note prices received support from the nomination of Janet Yellen as the next Fed Chair since she is expected to be in no hurry to end QE3. Also, Chicago Fed President Evans said more accommodation is warranted to spur an inadequate expansion as “U.S. growth is not nearly strong enough.”
Fundamental Outlook—Bear Market Correction—T-note prices fell back on signs U.S. lawmakers may agree on an increase in the debt ceiling. The long-term trend remains bearish on factors that include (1) Treasury yields below fair value with maturities of less than about 6 years trading at negative inflation-adjusted yields, (2) reduced global economic concerns as Chinese economic activity picks up, and (3) recent record-high stock prices. Bullish factors include (1) safe-haven demand from the ongoing political infighting in Washington, (2) the Fed’s action to maintain the $85 billion a month pace of its QE3 program, (3) U.S. fiscal austerity with the sequester, and (4) disinflation concerns with the June core PCE deflator at the very low level of +1.2% y/y.
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12/13 12/14 12/15 12/16 12/17 12/18 12/19
Expected 3-mo Eurodollar Rate Futures Curve
Latest Month-Earlier 3-mo Earlier
3-mo Earlier
Current
1-mo Earlier
0.00%
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0.50%
0.75%
1.00%
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10/13 02/14 06/14 10/14 02/15 06/15 10/15 02/16
Expected Federal Funds Rate Futures Curve
Latest Month-Earlier 3-mo Earlier
Current
1-mo Earlier3-mo Earlier
-25
0
25
50
75
100
125
150
10/13 4/14 10/14 4/15 10/15 4/16
Expected Fed Rate Change (bp)
0%
1%
2%
3%
4%
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2005 2006 2007 2008 2009 2010 2011 2012 2013
3-Mo Eurodollar vs 10-Yr T-note Yield (%)
3-mo Eurodollar Rate
10-yr T-note
0.0%
0.5%
1.0%
1.5%
2.0%
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05 06 07 08 09 10 11 12 13
10-year Inflation Expectations
4
DOLLARThe dollar index corrected up to a 2-week high on Thursday from its recent 8-month low on signs of a possible compromise between U.S. lawmakers on a hike in the debt ceiling. The dollar also found support on increased safe-haven demand after the S&P 500 tumbled to a 1-month low. Limiting strength in the dollar was President Obama’s nomination of Janet Yellen as the next Fed Chairman, which fueled speculation the Fed will maintain its highly stimulative and dollar-negative monetary policies. Also, San Francisco Fed President John Williams said “U.S. unemployment is still too high and inflation is too low” and that the econ-omy will probably need sustained unconventional stimulus for the “next few years.” EUR/USD fell back from its recent 8-1/4 month high after German Aug factory orders unexpectedly fell -0.3% m/m, weaker than expectations of a +1.1% m/m increase, and after the Eurozone Oct Sentix investor confidence unexpectedly fell -0.4 from Sep to 6.1, weaker than expectations of a +2.0 point increase to 8.5.
Fundamental Outlook—Bear Market Correction - The dollar is cor-recting higher, although the trend remains bearish on concern the Fed will maintain its dollar-negative QE as the shutdown of the U.S. govern-ment begins to undercut economic growth. Bearish factors include (1) the political wrangling in Washington over a continuing resolution and the debt ceiling, (2) the Fed’s action to maintain QE3, (3) the likelihood for near-zero rates until 2015, and (4) the persistent U.S. current account deficit. Bullish factors include (1) the substantially better performance of the U.S. economy relative to Europe and Japan, and (2) the BOJ’s ag-gressive QE program.
Expected US, Eurozone & Japan 3-Mo Interbank Rates
Euroyen Euribor 3-mo Dollar Libor
3-mo Dollar Libor
3-mo Euribor
3-mo Euroyen
-1.5%
-1.0%
-0.5%
0.0%
0.5%
1.0%
1/09 7/09 1/10 7/10 1/11 7/11 1/12 7/12 1/13 7/13
3-mo Interbank Interest Rate Differentials
US-Euribor
US-Japan
US-UK
Rising interest rate differen-tials are bullish for the dollar
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US Trade and Ex-Petroleum Deficits
bln
US Trade Deficit ($bln)
US Trade Deficit Ex-Petroleum
bln
1.34
1.36
1.38
1.40
1.42
1.44
1.46
1.48
Spot 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y
Forward EUR/USD FX Rate $/Eur
70
75
80
85
90
95
100
Spot 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y
Forward USD/JPY FX RateYen/$
5
GOLDDec gold prices recovered slightly from their recent 2-month low on in-creased safe-haven demand as the U.S. government remains shut down and the debt ceiling deadline draws near. In addition, gold climbed on speculation the continued shutdown of the government will slow the economy and prevent the Fed from cutting stimulus. Hedge funds, how-ever, continue to liquidate long gold positions as gold in ETFs fell to a 3-1/3 yr low Friday. Chinese gold imports during Jan-Jun of 1,098 MT have already nearly matched last year’s full-year total of 1,139 MT.
Fundamental Outlook—Short-Term Bearish—Dec gold prices bounced back on safe-haven demand from the political dysfunction in Washington. The overall trend remains bearish on factors that include (1) fund liquidation as gold in ETFs has plunged by -27% so far this year to Friday’s 3-1/3 yr low of 1,922 tons, (2) reduced Middle East concerns, and (3) disinflation concerns with the April-July core PCE deflator at a 2-1/2 year low of +1.2% y/y. Supportive factors include (1) dollar weak-ness, (2) physical buying of gold in Asia, and (3) easy global monetary policies.
Gold Supply/Demand Summary
Gold Council—Q2 gold demand slumped -14% q/q and -12% y/y to 856.3 MT. Jewelry demand in Q2 +4.4% q/q and +36.8% y/y to 576 MT. Total investment demand in Q2 -54% q/q and -63% y/y to 105.4 MT. Q2 gold mine production +8.2% q/q and +3.6% y/y to 732.2 MT. Q2 total gold supply –0.4% q/q and -5.7% y/y to 1,025.5 MT.
Copper Supply/Demand Summary
International Copper Study Group: 2012 production 20.114 MMT (+2.7% y/y), consumption 20.512 MMT (+3.4% y/y), –397,000 MT deficit. 2013 production 20.983 MMT (+4.3%), consumption 20.566 MMT (+0.3%), surplus 417,000 MT.
COPPERDec copper prices remain range-bound. The ongoing U.S. government shutdown has undercut copper as it bolstered speculation that U.S. eco-nomic growth and copper demand will slow. The World Bank’s cut in its 2013 GDP forecast for China to 7.5% from an April estimate of 8.3% was negative, as was the IMF’s cut in its 2013 global growth outlook to 2.9% from July’s 3.1%. Chinese copper demand is suspect with Jan-Aug China copper imports this year down -19.4% y/y. Bullish factors include (1) signs of dwindling supplies as LME copper inventories fell to a 6-3/4 month low, (2) the unexpected action by the Fed to maintain QE3 and (3) optimism in the U.S. housing market with the Sep NAHB housing market index at a 7-3/4 yr high.
Fundamental Outlook—Medium-term Neutral—Copper prices are moving sideways. Bearish factors include (1) the drop in Chinese de-mand (Jan-Aug 2013 China refined copper imports -19.4% y/y to 1.93 MMT), (2) concern that global central banks may begin reducing stimu-lus, and (3) ICSG’s forecast for a 417,000 MT copper surplus in 2013 after a -397,000 MT deficit in 2012.
CRUDE OILNov WTI crude oil prices remain under pressure as they attempt to hold above their recent 3-month low. The ongoing shutdown of the U.S. gov-ernment is pressuring crude oil on concern about economic growth and energy demand. Also, the IMF cut its 2013 and 2014 global growth out-looks and the World Bank cut its 2013 GDP forecast for China to 7.5% from its April estimate of 8.3%. Another negative for crude was Wednes-day’s weekly EIA report that showed crude inventories jumped +6.807 million bbl, well above expectations of +940,000 bbl, while U.S. crude production in the week ended Oct 4 rose +0.3% to 7.809 million barrels day, just below last month’s 23-3/4 yr high of 7.827 million barrels a day. On the bullish side, the EIA in its Short-Term Energy Outlook raised its 2013 global crude consumption estimate to 90.26 million barrels a day from 90.06 million forecast last month. EIA data also showed crude oil inventories at Cushing fell for a fourteenth week as they dropped -168,000 bbl to a 1-1/2 yr low of 32.6 million bbl. OPEC supplies re-main sufficient with OPEC crude output in Sep at 31.08 million barrels a day, the most in 10 months.Fundamental Outlook—Bull-Market Correction—Crude prices fell back on increased supply and on demand concerns. The longer-term trend is bullish on factors that include (1) underlying strength in the U.S. economic data, (2) the ongoing Syria crisis, (3) the sharp drop in Iranian and Libyan oil production and exports, and (4) the tight level of U.S. distillate inventories (-15.0% below 5-yr avg). Bearish factors include (1) the shutdown of the U.S. government, (2) the recent 23-3/4 year high in U.S. oil production, and (3) above-average crude inventories (+8.7% above the 5-yr avg) and gasoline inventories (+7.4% above the 5-yr avg).
CORNDec corn prices are attempting to hold above their recent 3-year low. The USDA reported on Sep 30 that quarterly U.S. corn stockpiles as of Sep 1 were at 824 million bu, well above expectations of 661 million bu. The USDA in the Sep 12 WASDE report unexpectedly raised its U.S. corn production estimate to 13.843 bln bu, more than expectations for a cut in production to 13.641 bln bu. The USDA also raised its 2013/14 global corn production and ending stocks estimates to records as recent rains boosted the condition of the corn crop. The most recent Crop Progress report showed the corn harvest was behind schedule with only 12% of the crop harvested as of Sep 29, behind the 5-year average of 23%. An-other positive was IGC’s recent cut in its 2013/14 global corn production estimate to 943.2 MMT from an Aug estimate of 945.4 MMT.Exports Net Sales (week ended Sep 19): 640,139 MT; 2012/13 (Sep-Aug) cumulative exports –29.9% y/y.
Fundamental Outlook—Bearish—Corn prices are trying to hold above their recent 3-year low. Bearish factors include (1) USDA estimates for a record U.S. corn crop this fall despite dry weather in August, (2) USDA estimates for record 2013/14 global corn production of 957 MMT and record corn ending stocks of 151 MMT, and (3) dismal U.S. corn export sales (-29.9% y/y). The USDA is forecasting 2013/14 U.S. corn produc-tion at a record 13.84 bln bu (+28% y/y) and ending stocks at 1.855 bln bu (vs this year’s 661 mln bu). Until the harvest, though, supplies will be tight. The 2012/13 U.S. stocks-to-use ratio of 5.9% is the tightest in nearly 20 years and the global corn stocks-to-use ratio of 14.1% is the tightest since the early 1970s.
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Global Corn Stocks-to-Use Ratio vs Corn Price
07/08
06/0708/09
04/05
09/1003/0402/0300/01
01/02 05/06
2013/14 Stocks/Use Ratio 16.3%
10/1111/12
12/13
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US Corn Stocks-to-Use Ratio vs Corn Price
07/08
06/0708/09
04/05
09/1003/04
02/0300/01
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05/06
2013/14 Stocks/Use Ratio 14.6%
10/11 11/12
12/13
US & Global Corn Supply/Demand TablesUS (bln bu) Global (MMT)
2012/13 2013/14 2012/13 2013/14
Area Planted 97.2 97.4
Area Harvested 87.4 89.1
Yield 123.4 155.3
Production 10.78 13.84 860.06 956.67
yoy% -12.8% +28.4% -2.7% +11.2%
Exports 0.735 1.225 94.35 102.72
yoy% -52.4% +66.7% -19.3% +8.9%
Usage 11.270 12.675 869.31 927.84
yoy% -10.0% +12.5% -3.1% +6.7%
Ending Stocks 0.661 1.855 122.59 151.42
vs 5-yr avg -53.6% +50.6% -5.3% +14.2%
Stocks/Use Ratio 5.9% 14.6% 14.1% 16.3%
vs 5-yr avg -5.4% +4.8% -2.6% +0.2%
Source USDA WASDE Report: 12-Sep-2013
Notes: US planting in mln acres.
0
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US Corn Exports 2012/13 vs 5-yr avg (MMT)
Cumulative Exports
5-yr avg
60
70
80
90
91 93 95 97 99 01 03 05 07 09 11 13
US Corn Harvested (mln acres)
90
110
130
150
170
90 92 94 96 98 00 02 04 06 08 10 12
US Corn Yield (bu/acre)
8
SOYBEANSNov soybeans bounced up from their recent 1-1/2 year nearst-futures low on concern that recent heavy rains in the Midwest will keep farmers out of muddy fields and delay the U.S. soybean harvest. The USDA on Sep 30 reported that quarterly U.S. soybean stockpiles on Sep 1 totaled 141 million bu, above market estimates of 125 million bu. The USDA in Sep 12 WASDE report cut its U.S. soybean production estimate for this year to 3.149 billion bu from Aug’s 3.255 bln and also cut its U.S. soybean ending stocks estimate to 150 mln bu from 220 mln. Strong Chinese de-mand is a positive for soybean prices as USDA data shows that Chinese purchases of U.S. soybeans for the marketing year through Sep 19 are at 17 MMT, up +29% from the same period last year. Researcher Agrural predicts 2013/14 Brazil soybean output will increase +9.3% y/y to a re-cord 89.1 MMT as planted acreage climbs +6.5% y/y to 72.5 mln acres.Weekly US soybean exports net sales (week ended Sep 19): 2,826,332 MT, 2012/13 (Sep-Aug) cumulative exports -34.1% y/y.Fundamental Outlook—Medium-Term Bearish—Soybean prices are consolidating just above their 1-1/2 year nearst-futures low. Negative factors include (1) Brazil’s record 2012/13 soybean crop (Brazil’s Conab forecast is +23% y/y at 81.5 MMT), and (2) USDA forecasts for a +5.3% y/y increase in 2013/14 global soybean production to a record 281.66 MMT and a +16% increase in global soybean ending stocks to a record 71.54 MMT. Bullish factors include (1) tight near-term U.S. supplies with U.S. 2012-13 ending stocks at a 9-yr low of 125 mln bu (stocks-to-use ratio at a very tight 4.0%), although the 2012-13 world stocks-to-use ratio is middling at 23.9%, and (2) strong Chinese demand for U.S. soybeans.
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Global Soybean Stocks-to-Use Ratio vs Price
07/08
06/07
08/09
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05/06
2012/13 Stocks/Use Ratio 26.6%
10/11 11/1212/13
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US Soybean Stocks-to-Use Ratio vs Price
07/08
06/07
08/09
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09/10
03/0402/03
00/01 01/0205/06
2013/14 Stocks/Use Ratio 4.8%
10/1111/12
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US Soybean Exports 11/12 vs 5yr avg-MMT
5-yr avg
Cumulative Exports
50
60
70
80
90 92 94 96 98 00 02 04 06 08 10 12
Soybeans - US Harvested Acres (mln)
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35
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90 92 94 96 98 00 02 04 06 08 10 12
US Soybean Yield (bu/acre)
US & Global Soybean Supply/Demand TablesUS (bln bu) Global (MMT)
2012/13 2013/14 2012/13 2013/14
Area Planted 77.2 77.2
Area Harvested 76.1 76.4
Yield 39.6 41.2
Production 3.02 3.15 267.48 281.66
yoy% -2.6% +4.4% +11.8% +5.3%
Exports 1.315 1.370 97.74 107.29
yoy% -3.7% +4.2% +5.9% +9.8%
Usage 3.099 3.140 257.91 268.89
yoy% -1.8% +1.3% +0.4% +4.3%
Ending Stocks 0.125 0.150 61.55 71.54
vs 5-yr avg -28.8% -6.0% +8.2% +16.1%
Stocks/Use Ratio 4.0% 4.8% 23.9% 26.6%
vs 5-yr avg -1.5% -0.2% +0.5% 3.1%
Source USDA WASDE Report: 12-Sep-2013
Notes: US planting in mln acres.
9
WHEATDec wheat prices perked up to a 3-month high on signs of smaller global output after planted wheat acreage in Russia and the Ukraine was re-duced because of record rains. Also, the USDA reported Sep 30 that U.S. wheat quarterly stockpiles were 1.855 bln bu on Sep 1, below market ex-pectations of 1.945 bln bu. Expectations of additional Chinese demand for U.S. wheat supplies is another supportive factor on signs that record high wheat prices in China will prompt the Chinese government to sell wheat from its own stockpiles and import more to curb rising prices. China National Grain and Oils Information Center predicts that China will import 6.5 MMT of wheat in the 2013/14 crop year, a 9-yr high, and as China has bought 3.45 MMT of U.S. wheat since Jun 1, up tenfold y/y. The USDA in the Sep 12 WASDE report raised its 2013/14 global wheat production estimate to a record 708.89 MMT. The USDA also hiked its 2013/14 U.S. wheat ending stocks estimate to 561 mln bu and unexpect-edly raised its global wheat ending stocks estimate to 176.28 MMT.Weekly US wheat exports net sales (week ended Sep 19): 620,212 MT; cumulative 2012/13 (June 1-May 31) all-wheat exports: +39.9% y/y.
Fundamental Outlook—Short-term Bullish—Dec wheat prices are correcting higher. Prices sank to a 1-1/4 yr low in Aug on the outlook for adequate global supplies as the USDA hiked its 2013/14 global wheat output and ending stocks estimates. The USDA pegs 2012/13 ending stocks at 718 mln bu, well above the 10-yr avg of 615 mln bu. The U.S. wheat 2012/13 stocks-to-use ratio is currently at 29.7%, above the 10-year average of 28.3%. Current world wheat supplies are normal with a 2012/13 stocks-to-use ratio of 25.5%, just above the 10-yr avg of 25.4%.
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Global Wheat Stocks-to-Use Ratio vs Price
07/08
06/07
08/09
04/05
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03/0402/03
0
01/02
2013/14 Stocks/Use Ratio 25.0%
05/0600/01
10/11
11/12
12/13
$2.00
$4.00
$6.00
$8.00
$10.00
10%15%20%25%30%35%40%45%50%
US Wheat Stocks-to-Use Ratio vs Price
07/08
06/07
08/09
04/05
09/10
03/0402/03
0
01/02
2013/14 Stocks/Use Ratio 23.3%
05/06
00/01
10/1111/12
12/13
US & Global Wheat Supply/Demand TablesUS (bln bu) Global (MMT)
2012/13 2013/14 2012/13 2013/14
Area Planted 55.7 56.5
Area Harvested 49.0 45.7
Yield 46.3 46.2
Production 2.27 2.11 655.20 708.89
yoy% +13.5% -6.8% -6.0% +8.2%
Exports 1.007 1.100 138.32 154.52
yoy% -4.2% +9.2% -12.4% +11.7%
Usage 2.416 2.411 680.67 706.47
yoy% +8.3% -0.2% -2.3% +3.8%
Ending Stocks 0.718 0.561 173.85 176.28
vs 5-yr avg +1.3% -29.1% -2.2% -6.4%
Stocks/Use Ratio 29.7% 23.3% 25.5% 25.0%
vs 5-yr avg -2.2% -11.9% -1.6% -3.4%
Source USDA WASDE Report: 12-Sep-2013
Notes: US planting in mln acres.
0
5
10
15
6/13 9/13 12/13
US Wheat Exports 12/13 vs 5-yr avg (MMT)
5-yr avg
Cumulative Exports
40
50
60
70
90 92 94 96 98 00 02 04 06 08 10 12
US Wheat Harvested Acres (mln acres)
30
35
40
45
50
90 92 94 96 98 00 02 04 06 08 10 12
US Wheat Yield (bu/acre)
10
Hogs Supply/Demand
Quarterly Hogs & Pigs (Jun 28)—Jun 1 US hog inventory +1.1% q/q and unch y/y at 66.647 mln hogs. US hog-breeding herd as of Jun 1 rose +0.8% q/q and +0.3% y/y to 5.882 million sows. Cold Storage (Sep 23) - Aug pork cold storage stocks fell -0.7% m/m and -7.8% y/y (vs. July’s -3.8% m/m and -1.1% y/y).
Cattle Supply/Demand
Cattle on Feed Report (Sep 20) - Cattle-on-Feed as of Aug 1 were 94% of yr-earlier vs 97% on July 1; cattle placed on feed in Aug were 89% of the year-earlier vs 90% in July.
Cold Storage (Sep 23) - Aug beef cold storage stocks -6.2% m/m and +0.2% y/y (vs July’s -3.9% m/m and +0.3% y/y).
LIVE CATTLEDec cattle prices rose to a 7-3/4 month high, though prices remain con-strained due to a dearth of USDA data with the government shutdown. The Cattle on Feed report (Sep 20) showed cattle placed on feed in Aug totaled 1.788 million head, the lowest on record dating back to 1996 and a sign of tightening supplies. Foreign demand has improved with U.S. July beef exports up +12.9% m/m and +14.7% y/y to 264.6 mln lbs. Aug beef cold storage stocks were 433.842 million lbs, down -6.2% m/m and up +0.2% y/y.
Fundamental Outlook—Medium-Term Bullish—Live cattle prices remain bullish on concern over tight supplies. The feedlot herd totaled 9.876 million on Sep 1, down -7.2% y/y, a bigger decline than expecta-tions of a -6.5% drop. Near-record high beef prices have had a limited impact on foreign demand thus far with Jan-July U.S. beef exports up +2.8% y/y to 1.453 bln lbs. The USDA forecasts 2013 U.S. beef produc-tion down -2.9% y/y to 25.437 bln and exports down -17.0% y/y to 2.312 bln lbs.
LEAN HOGSDec hog prices are trading modestly below last month’s contract high on speculation Chinese demand will rise for cheaper U.S. pork after Chinese domestic pork prices rose +0.3% during the week ended Oct 7. The Quar-terly Hogs & Pigs report for Q3 showed the U.S. domestic hog herd on Sep 1 unexpectedly rose +0.3% y/y to 68.360 mln hogs. U.S. July pork exports were up +1.9% m/m and +2.1% y/y to 406.6 mln lbs, although overall foreign demand remains suspect with U.S. Jan-July pork exports down -9.2% y/y at 2.850 bln lbs. Other negatives include (1) the increase in Q3 pig litters to 10.33 pigs per litter, +2.0% y/y, and (2) the +2.4% y/y increase in U.S. Aug hams in cold storage to a record 200.584 mln lbs.
Fundamental Outlook—Bull Market Correction—Dec hog prices are consolidating just below last month’s contract high. The latest Quar-terly Hog & Pigs report (Sep 27) showed all-hogs up +0.3% y/y and the breeding herd up +0.4% y/y The USDA is forecasting U.S. 2013 pork production at +2.9% to 23.427 bln lbs and 2013 pork exports up +3.1% to 5.028 bln lbs.
-40%
-20%
0%
20%
40%
01 02 03 04 05 06 07 08 09 10 11 12 13
Cold Storage - Total Beef (yoy%)
0.96
1.00
1.04
1.08
1.12
90 92 94 96 98 00 02 04 06 08 10 12
World Cattle Numbers (bln head)
-50%
-25%
0%
25%
50%
01 02 03 04 05 06 07 08 09 10 11 12 13
Cold Storage - Total Pork (yoy%)
6
10
14
18
90 92 94 96 98 00 02 04 06 08 10
Canada Hog Numbers (mln head)
11
Cotton Supply/Demand
USDA (2013/14): U.S. output 12.90 mln bales (-25.5% y/y), U.S. end-ing stocks 2.9 mln bales (-25.6% y/y), world production 116.38 mln bales (-3% y/y), world ending stocks 94.73 mln bales (+10% y/y).
COTTONDec cotton prices sank to a 1-month low on concern a slowdown in glob-al growth will hurt cotton demand after the IMF cut its 2013 and 2014 global growth estimates. The USDA on Sep 12 unexpectedly cut its U.S. cotton production estimate to a 4-yr low of 12.90 mln bales, although the USDA also raised its 2013/14 global cotton production and ending stocks estimates. Weak Chinese demand is another negative factor with China Jan-Aug cotton imports down -19.6% y/y to 3.03 MMT. The most recent (Sep 30) USDA Crop Progress report showed the good-to-excellent con-dition of the U.S. cotton crop (Sep 29) down -2 points to 42%. Cotton supplies have tightened as ICE-monitored cotton inventories recently fell to aa 11-month low.Weekly US cotton exports net sales (week ended Sep 19): 76,435 bales; cumulative 2012/13 (Aug-July) exports +5.8% y/y.
Fundamental Outlook—Medium-Term Neutral—Dec cotton prices are trendless and remain well below the 1-1/2 yr high from Aug. The USDA is forecasting 2013-14 U.S. cotton production at -25% y/y, exports at -20%, total usage at -16%, ending stocks at -26% y/y, and U.S. stocks-to-use ratio at 21% vs 24% in 2012-13. The 2013-14 world stocks-to-use ratio is very high at 86.5% vs 80.2% in 2012/13.
SUGARMarch sugar prices posted a 6-3/4 month high on the rally in the Brazil-ian real to a 3-1/2 month high against the dollar and on reduced supplies after Unica cut its Brazil’s 2013/14 Center South sugar output estimate to 34.2 MMT from 35.5 MMT forecast in April as heavy rains pared sugarcane yields. Sugar prices had been in a free fall over the past year to July’s 3-yr low on oversupply concerns. ISO forecasts 2012/13 global sugar production up +4.2% to a record 181.7 MMT and a record 2012/13 global sugar surplus of 10 MMT. Also, the ISO said it expects a 2013/14 global sugar surplus of 4.5 MMT, the fourth consecutive yearly surplus.
Fundamental Outlook—Short-Term Bullish—Sugar prices climbed to a fresh 6-3/4 month high and kept the short-term trend bullish as pric-es correct higher from July’s 3-year low. ISO is forecasting a 2013/14 (Oct-Sep) global sugar surplus of 4.5 MMT that, although down from an expected record 2012/13 surplus of 10 MMT, will still be the fourth consecutive surplus. Another negative for sugar prices was the recent plunge in the Brazilian real to a 4-1/4 year low against the dollar and the plunge in India’s rupee to a record low, which prompts sugar producers to sell their crops to take advantage of the weak currencies.
Sugar Supply/Demand
USDA: 2013/14 world production a record 174.853 MMT (+0.2% y/y), consumption 167.347 MMT (+2.3% y/y), ending stocks 38.227 MMT (-0.5% y/y, -1.1% below 5-yr avg), stocks-to-use ratio 20.2%.
123456
90 92 94 96 98 00 02 04 06 08 10
U.S. Sugar Production (MMT)
24681012
90 92 94 96 98 00 02 04 06 08 10
Thailand Sugar Production (MMT)
0100200300400500600700
1/11 7/11 1/12 7/12 1/13 7/13
ICE Cotton Inventories (thousand bales)
0
1
2
8/13 11/13
US Cotton Exports 13/14 (mln bales)
5-yr avg
Cumulative Exports
12
Cocoa Supply/Demand Summary
International Cocoa Organization: 2012/13 (Oct-Sep) gross crop 3.967 MMT –2.7% y/y; grindings 3.987 MMT +1.0% y/y, deficit -86,000 MT (vs +84,000 MT surplus in 2011/12), ending stocks 1.793 MMT (-45,000 MT from a record 1.838 MMT in 2011/12), and a 44.7% stocks to grinding ratio (vs 2011/12 46.6%).
COFFEE
Dec coffee prices are consolidating just above last month’s 4-yr low. Oversupply concerns are keeping prices under wraps as ICO on Mon-day raised its 2012/13 global coffee production estimate to 145.2 mln bags, up +9.6% y/y, and up from a previous estimate of 144.4 mln bags. The recent plunge in the Brazilian real to a 4-1/4 yr low against the dollar is fueling increased coffee exports from Brazil as foreign sales are more profitable than domestic sales. Current supplies are ample with ICE-monitored coffee stockpiles just under a 3-1/2 yr high and after GCA data showed U.S. Aug green coffee inventories rose +7.4% y/y to 383,253 bags, the most in 4 years. ICO said global coffee exports from Oct-July rose +3.4% y/y to 84.31 mln bags.Fundamental Outlook—Bearish—Coffee prices are just above their recent 4-yr low. ICO is forecasting (1) global 2012/13 coffee produc-tion of +9.6% y/y at a record 145.2 MMT, and (2) a 2012/13 surplus of 2.2 mln bags. Volcafe predicts a 2013/14 Brazil coffee harvest at a record 57.2 mln bags, up +0.7% y/y, even as coffee trees enter the lower yielding half of the 2-yr cycle.
Coffee Supply/DemandUSDA: 2012-13 world coffee production a record 151.3 mln bags (+4.8% vs 2011-12’s 144.4 mln bags); 2012-13 consumption 141.37 mln bags (+0.3% vs 2011/12’s 140.97 mln bags); 2012-13 world end-ing stocks at 27.9 mln bags (+11.9% vs 2011-12’s 24.93 mln bags); exports 116 mln bags (+1.4% vs 2011/12’s 114.4 mln bags); 2012-13 stocks/use 19.7% (vs 2012-13’s 17.7%).
COCOA
Dec cocoa prices rallied to a 13-month high after European Q3 cocoa processing rose +4.7% y/y. Supplies are also tight after data from CRA showed cocoa bean deliveries to Ivory Coast ports from farms were 1.416 MMT from Oct 1-Sep 30, down -4.1% from last year. Also, Gha-na, the world’s 2nd biggest producer, reported 2012/13 cocoa produc-tion of 837,000 MT, down -5% y/y. ICCO sees a 2012/13 global cocoa deficit estimate of -86,000 MT and also said it sees a -70,000 MT global cocoa deficit for 2013/14. Meanwhile, ICE-monitored cocoa inventories recently fell to a 7-1/2 month low. Cocoa prices also have support on drought concerns in West Africa. A negative factor was the hike by the ICCO to its 2012/13 global cocoa production estimate to 3.986 MMT.
Fundamental Outlook—Bullish—The trend for cocoa prices remains bullish on increased demand along with supply concerns on signs of re-duced output in West Africa. Q2 cocoa grinding demand was mixed: Asia +2% y/y, Europe +6.1% y/y, No. America +12% y/y. ICCO fore-casts a cocoa deficit of -86,000 MT for 2012-13 after the surplus of 84,000 MT in 2011/12 and a surplus of 333,000 MT in 2010/11.
Product Support: Click for: “Guide to the Top 10 Market-Moving Financial/Commodity News Reports
Global Financial &Commodity Report Calendar
Postponed Reports
US 0830 ET Aug trade balance (postponed due to U.S. government shut-down) expected -$39.5 billion, July -$39.1 billion.
1000 ET Aug factory orders (postponed due to U.S. government shut-down) expected +0.3%, July -2.4%.
0830 ET Sep non-farm payrolls (postponed due to U.S. government shutdown) expected +180,000, Aug +169,000. Sep private payrolls expected +182,000, Aug +152,000. Sep manufactur-ing payrolls expected +5,000, Aug +14,000. Sep unemploy-ment rate expected unch at 7.3%, Aug -0.1 to 7.3%.
0830 ET Sep avg hourly earnings expected +0.2% m/m and +2.1% y/y, Aug +0.2% m/m and +2.2% y/y. Sep avg weekly hours ex-pected unch at 34.5 hours, Aug 34.5 hours.
Friday, Oct 11
US 0830 ET Sep PPI expected +0.2% m/m and +0.6% y/y, Aug +0.3% m/m and +1.4% y/y (subject to postponement). Sep PPI ex food & energy expected +0.1% m/m and +1.2% y/y, Aug unch m/m and +1.1% y/y.
0830 ET Sep retail sales expected unch m/m and +0.4% m/m ex autos, Aug +0.2% and +0.1% ex autos.(subject to postponement).
0955 ET Preliminary U.S. Oct University of Michigan consumer confi-dence expected -1.6 to 75.9, Sep -4.6 to 77.5.
1000 ET Aug business inventories expected +0.3%, July +0.4% (sub-ject to postponement).
1100 ET Fed Governor Jerome Powell speaks on a panel on monetary policy at the 2013 Institute of International Finance Annual Membership meeting.
1200 ET Oct WASDE crop production report. 1300 ET Boston Fed President Eric Rosengren speaks on “Communi-
cating Monetary Policy at the Zero Bound” at the Council on Foreign Relations.
n/a World Bank and IMF annual meeting in Washington, D.C.GER 0200 ET German Sep wholesale price index, Aug -0.6% m/m and
-1.7% y/y. 0200 ET Revised German Sep CPI (EU harmonized), previous unch
m/m and +1.6% y/y.UK 0430 ET UK Aug construction output expected +0.8% m/m and +3.7%
y/y, July +2.2% m/m and +2.0% y/y.EUR 0830 ET ECB Executive Board member Peter Praet participates in the
“Global Economic Outlook” session at the 2013 annual mem-bership meeting for the Institute for International Finance.
CHI n/a China Sep trade balance expected +$26.17 billion, Aug +$28.52 billion. Sep exports expected +5.5% y/y, Aug +7.2% y/y. Sep imports expected +7.0% y/y, Aug +7.0% y/y.
Sunday, Oct 13
CHI 2130 ET China Sep CPI expected +2.8% y/y, Aug +2.6% y/y. Sep PPI expected -1.4% y/y, Aug -1.6% y/y.
Monday, Oct 14
US n/a U.S. markets open but government offices closed for Colum-bus Day.
EUR 0500 ET Eurozone Aug industrial production expected +0.5% m/m and -2.4% y/y, July -1.5% m/m and -2.1% y/y.
JPN n/a Japanese markets closed for Health-sports Day.
Tuesday, Oct 15
US 0830 ET Oct Empire manufacturing index expected +1.71 to 8.00, Sep 6.29.
1100 ET USDA weekly grain export inspections. 1600 ET USDA Crop Progress.JPN 0030 ET Revised Japan Aug industrial production, previous -0.7% m/m
and -0.2% y/y. Aug capacity utilization, July +3.7% m/m. UK 0430 ET UK Sep PPI input prices expected+0.1% m/m and +2.9% y/y,
Aug -0.2% m/m and +2.8% y/y. 0430 ET UK Sep PPI output prices expected +0.2% m/m and +1.5%
y/y, Aug +0.1% m/m and +1.6% y/y/. Sep output core ex-pected +0.2% m/m and +0.9% y/y, Aug unch m/m and +1.0% y/y.
0430 ET UK Sep CPI expected +0.3% m/m and +2.6% y/y, Aug +0.4% m/m and +2.7% y/y. Sep CPI core expected +2.0% y/y, Aug +2.0% y/y.
0430 ET UK Sep RPI expected +0.4% m/m and +3.2% y/y, Aug +0.5% m/m and +3.3% y/y. Sep RPI ex-mortgage interest payments expected +3.2% y/y, Aug +3.3% y/y.
GER 0500 ET German Oct ZEW survey expectations expected +1.4 to 51.0, Sep 49.6. Oct ZEW current situation expected 0.2 to 30.4, Sep 30.6.
Wednesday, Oct 16
US 0700 ET Weekly MBA mortgage applications, previous +1.3% with pur-chase sub-index -0.7% and refi sub-index +2.5%.
0830 ET Sep CPI expected +0.2% m/m and +1.2% y/y, Aug +0.1% m/m and +1.5% y/y. Sep CPI ex food and energy expected +0.2% m/m and +1.8% y/y, Aug +0.1% m/m and +1.8% y/y.
1000 ET Oct NAHB housing market index expected -1 to 57, Sep 58. 1330 ET Cleveland Fed President Sandra Pianalto speaks on “Hous-
ing in the National Economy” at the Northeast Ohio Real Es-tate Convention.
1400 ET Fed releases Beige Book. 1630 ET API weekly U.S. oil statistics. 1845 ET Dallas Fed President Richard Fisher speaks at an Intelligence
Squared U.S. Debate on “Break Up the Big Banks.”EUR 0200 ET Eurozone Sep new car registrations, Aug -5.0%. 0500 ET Revised Eurozone Sep CPI, previous +1.3% y/y and core
+1.0% y/y.UK 0430 ET UK Sep jobless claims change expected -25,000, Aug
-32,600. Sep claimant count rate expected -0.1 to 4.1%, Aug 4.2%.
0430 ET UK Aug avg weekly earnings expected +1.0% 3-mo/year-over-year, July +1.1% 3-mo/year-over-year. Aug avg weekly earnings ex-bonus expected +1.0% 3-mo/year-over-year, July +1.0% 3-mo/year-over-year.
0430 ET UK Aug ILO unemployment rate expected 7.7% 3-months, July 7.7% 3-months.
Thursday, Oct 17
US 0745 ET Dallas Fed President Richard Fisher speaks at the Economic Club of New York breakfast.
0830 ET Weekly initial unemployment claims, previous +66,000 to 374,000. Weekly continuing claims, previous +16,000 to 2.905 million.
0830 ET Sep housing starts expected +2.4% to 913,000, Aug +0.9% to 891,000. Sep building permits expected +1.0% to 935,000, Aug -2.9% to 926,000.
0915 ET Sep industrial production expected +0.4%, Aug +0.4%. Sep capacity utilization expected +0.2 to 78.0%, Aug 77.8%.
1000 ET Oct Philadelphia Fed manufacturing index expected -6.3 to 16.0, Sep 22.3.
