Federal Reserve made very few changes in its economic forecast

INTERNATIONAL FUTURES GROUP

LET US SHOW YOU THE FUTURES

LEE A. GAUS, STEVEN D. ERDMAN, THOMAS E. FRITZ

2010-07-15

The Federal Reserve made very few changes in its economic forecast, but the changes highlighted the notion that the U.S. economic recovery is slowing. Citing the potential impact of the European debt crisis, a lingering soft housing market and prolonged unemployment the Fed reduced its projected growth between 3% and 3.5% of GDP, compared to its earlier estimate of 3.2% to 3.5%. The Fed projects the unemployment rate to fall from the present level of 9.5% to 9.2%. It would be helpful if the Fed would make their projections based on the more accurate unemployed/underemployed number which now stands at about 16.5%. The Fed’s prediction of a 9.2% unemployment rate may come true only to find that the decline of .3% just switched from the unemployed (receiving benefits) to the unemployed/underemployed category. We found it interesting that the Fed concluded that with reduced growth and stubborn unemployment there was less threat of inflation. Now we have ask just how many PHD’s in economics did it take to come to that conclusion? The more conservative expectation of growth has the Fed discussing possible alternative methods to stimulate growth beyond what they are already doing.

While the report from the Fed helped end the six day streak of higher Dow-Jones closes, the European markets were mixed waiting on Thursday’s quarterly JP Morgan report.

The U.S. Dollar declined on pressure from a continuing number of disappointing economic reports, the latest being U.S. retail sales report coming in worse then expected. Retail sales for June fell 0.5% which marked the second consecutive month that retail sales have declined. The U.S. Dollar also came under pressure as fear of a Euro calamity has at least temporarily faded. This new found confidence was aided by positive manner in which the Greek bond sale took place. We do not want to get overly enthused knowing that on July 23rd the results of the stress tests being conducted at 91 European banks will be made public.

The August Crude oil futures contract was fractionally lower, down .11 cents finishing at $77.04 for the day. In the weekly report the Energy Department stated that crude inventories were reduced by 5.1 million barrels, compared pre-report guesses of a decrease of 2.6 million barrels. Gasoline stocks increased 1.6 million barrels compared to pre-report guesses of an increase of 950,000 barrels.

August Gold closed at $1,207.00, down $6.50 for the day, the September Euro closed up .0028, finishing the day at 1.2730, while the September U.S. Dollar closed down .233, finishing at 83.598. With the plethora of information, reports, and announcements that will be forthcoming over the next several weeks we find it hard to believe that anyone wants to take a major position in Gold, Euro, Crude, or the U.S. Dollar. We view the reaction to the European Bank stress test, which will not be issued until July 23, as critical to the values of Gold, Euro, Crude and the U.S. Dollar. Until the release of that report we will trade these markets counter to any major move.

CORN

Corn futures challenged recent highs following stronger wheat and fears of extreme heat impacting corn that has yet to pollinate from central Illinois west. Heat indices in excess of 110 degrees have been reported in western Illinois and points west, southwest. Basis levels for corn are steady given the rally as most the corn that is moving is lower quality corn and many end-users are reluctant of this lower grade corn. Taking Chicago Board of Trade delivery won’t help these users as # 3 yellow corn is acceptable for delivery. Remember the U.S. has a great deal of corn to ship just to meet existing sales that are on the books. Adding to this we are seeing improved speculative participation due to the headlines highlighting the "catastrophic" drought in Russia. I still think this is old news to commodity traders but when it makes it to the public media it adds a degree of new excitement.

Short term forecasts have very high temperatures over the next couple of days with two rain systems crisscrossing the Midwest between now and early next week. After that many are thinking we could see an impressive hot ridge develop over a good portion of the Midwest. The National Weather Service hasn’t totally accepted this idea yet but it appears they agree with warmer conditions and dryness in the southwestern reaches of the Corn Belt. Their forecasts have finally moved away from the above normal moisture in most of the Midwest; now predicting normal moisture. The primary Chinese corn growing areas are expecting moisture with no extreme heat.

The technical look is impressive given the poor close on Tuesday and lack of follow-through on Wednesday. The 100 day Moving Average ($3.85) continues to hold. The past two days of action was very similar to what we saw on the 6th and 7th of July. Strength in wheat and beans helped but the selling from the hedge types was the lightest to date since originally challenging these levels. For the near term December corn has built in some decent support in the mid-$3.80’s. As long as the forecasts are suggesting the possibility of a dome developing next week and the unknown exists around the national yield this market will remain well supported. There is an adage that the market goes to the orders; we have cleaned up most the selling at current levels. The next level of resistance is $4.02-$4.03, the 200 day Moving Average. We go through that area and the next level of resistance will be about $4.15.

Daily Support & Resistance

Sept Corn: $3.78 - $3.90

Dec Corn: $3.90 - $4.02

SOYBEANS

July meal and July beans expired quietly on Wednesday. There were 25 contracts registered for delivery ay the Chicago facility. We’ll see who delivers them and who stops them and that could give us some insight to the direction of the August contract moving forward. We suggest buying any sharp break between now and Friday or at least consider the August Sept spread at 20 -18 cents. There were 127 meal tickets have been registered for delivery. Once again we’ll see who delivers them and who stops them and go from there. NOPA crush data continues to show a slowing rate of crush. This is not due to slack demand but the inability to originate old crop beans. There was surprise in the NOPA crush data; bean stocks continue to be quite large considering the slowing rate of crush. We attribute this to the lack of demand from the bio-diesel sector. Basis levels for export continue to strengthen for spot beans. The bull spreads continue to correct due to the potential for a weather situation developing in new crop attracting more speculators to the new crop compared to the old crop. The unknown usually creates more interest compared to the known. Many weather forecasters are suggesting the possibility of a lasting dome of heat developing by mid next week. If this weather play does develop and sticks around for any length of time it could have dire effects on a good portion of the US soybean crop. There are forecasts for rain to develop across the Midwest between now and early next week. If these rains fail to materialize with decent coverage new crop soybean prices will be off to the races by early next week. Given the short term forecasts vs. the longer term forecasts it wouldn’t surprise me to see some backing and filling as we move into the weekend.

The technical look is still advertising some sort of a top in old crop meal prices. Yesterday I wasn’t sure what was developing in old crop beans but after Wednesday it appears some sort of a top is developing here as well. The bean oil market appears to be running out of steam as well with its inability to advance past Tuesday’s highs. New crop beans continue to stair step higher – this is a very difficult price pattern to predict given that at each stair there are now sell stops. New crop meal has been unable to advance beyond the highs it made last week. If meal can’t follow through can beans further their advance? The bottom line is I’m a bit mistrusting of beans and meal at current levels given the short term forecasts (rain) vs. betting on the come with the longer term forecasts. If you want to be a hero sell current levels but make sure you use protective stops. If you want to bet on the come with the longer term forecasts its called buy November 2010 beans sell November 2011 beans.

Daily Support & Resistance

Aug Beans: $9.82 - $10.02

Nov Beans: $9.45 - $9.61

Aug Meal: $292.00 – $302.00

Dec Meal: $272.00 - $280.50

Aug Bean Oil: $37.50 - $38.50

Dec Bean Oil: $38.35 - $39.40 　　

WHEAT

The media has brought the public into Chicago futures with the story of the Russian drought and that pushed futures to new highs/closes for the current move. We continue to see this as old news but it does create further discussion of yet lower global supplies. September Chicago wheat has now rallied $1.11 since the June 29th low. Chicago continues to gain on Kansas City and Minneapolis as this is where the speculators come due to its liquidity, the ability to handle the bigger volume. Basis for Soft Red Wheat has succumbed to the higher prices especially at the Gulf. The Chicago wheat futures are now modestly overbought. The trade will be constantly crunching numbers attempting to determine if the U.S. can offset lower wheat crops elsewhere in the world. Most believe the USDA will raise the US wheat crop on its August report; will the USDA lower wheat crops elsewhere? Reports out of the Dakotas suggest great yields but with lower protein. Lower protein wheat will compete in the feed circles indirectly weighing on corn.

Harvesting conditions for the balance of the winter wheat crop remain quite good. The weather forecasts for the spring wheat crop remain quite good. Remember, the spring wheat crop is grown further north, north of the current big heat and they are getting moisture.

The technical look suggests overbought flat price Chicago futures, over bought on the inter-market spreads involving KC wheat, Minneapolis wheat, corn and soybeans as well. Given this we think wheat prices have gone far enough, especially Chicago. We are thinking that if the World wheat situation was as bad as advertised rice prices would be following and they are not responding. Our target area has been $5.60 for September wheat and we are now there. Fading the inter-market spreads that involve long Chicago wheat is an alternative if one does not want to be short wheat outright.

Daily Support & Resistance

Sept Wheat: $5.47 - $5.66

Dec Wheat: $5.77 - $5.95

A word to the Wise

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