Go ahead and make my day. Commodity prices explode in what really shouldn't be called trading, it should be called tainting. One day after paying all due respect to the Federal Reserve the dollar tanked and the commodities rallied almost trash talking the Federal Reserve and daring them to do something about it. I know what you're thinking, did the Fed cut rates 4 times or was it five? In fact in all the excitement I kind of forgot myself. I guess the question is: does the Fed feel lucky? Well do ya punk? The commodity markets are confident that the Fed is powerless at this point and does not have the courage to challenge the dollar. Everyone knows that the Fed can't raise rates and the Fed will keep the target range for the federal funds rate at 0 to ¼. The fact is the market does not believe the Fed has the courage to even hint at an exit strategy. Go ahead, keep printing money.
At the last meeting the Fed was very clever. They tried to start backing away from quantitative easing without really doing so. The Fed said that they would continue with their plan to purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year and $300 billion of Treasury securities. Yet the Committee said that they had decided to gradually slow the pace of these transactions and anticipates that the full amount will be purchased by the end of October. Those purchases of course are made with freshly printed money. At this point the Fed has completed 94% of the purchases.
The market believes the Fed does not care about the impact of rising commodity prices and an anemic dollar. That the Fed will blow off a rise in the CPI because most of the increase was in those pesky energy and commodity prices. I mean the Fed said itself that they feel that inflation will remain subdued for some time and that, substantial resource slack is likely to dampen cost pressures. In other words, the Fed thinks that the massive global oversupply of oil will keep prices in check. And based on where the price of gold is, perhaps they are right to some extent. Yet to take the rising cost of commodities and the decrepit dollar too lightly, the Fed could be making a fundamental error that could drive the global economy back into recession. That is assuming that we are out of a recession though we must be because Fed chairman Bern Bernanke said we were. Right?
The weak dollar is a problem. The Fed may not have to change things this month but if they keep the Fed statement the same, they had better think of some other ways to support the dollar. If they don't, they will be giving the green light to commodity funds to buy and may add fuel to a new leg up in commodities across the board.
Can the global economy withstand another spike in commodities? Oh yes, I know that the strong Euro means commodities are not as expensive for them and China will keep buying, yet the imbalance and the eerily similar relationship we had a year ago when the stock market eventually collapsed can't be ignored. A bad Fed move here could create conditions for an October stock market crash inspired by a slowdown in growth caused by surging commodity prices.
Not only do we have the Fed today, we get the weekly report from the Department of Energy and their version of US supply and demand. Last night we saw the American Petroleum Institute's version and they showed that crude stocks increased by 276,000 barrels. Most analysts were looking for a draw. The API said that distillate stocks fell by 1.9 million barrels and that was a surprise but not as surprising as an increase gasoline supply build of 3.8 million barrels.
As for demand, Barbara Powell at Bloomberg News says that according to a MasterCard Inc. report, gasoline consumption last week was up 4.2 percent from a year earlier when Gulf Coast hurricanes disrupted supply. Motorists bought an average 9.09 million barrels of gasoline a day in the week ended Sept. 18, MasterCard, the second-biggest credit-card company, said in its SpendingPulse report. That's 1.4 percent above the prior week, when demand was the weakest since Jan. 9.
Reuters News reports that the Grand Poobah and de-facto leader of the OPEC cartel says that OPEC does not need to cut output next year, according to the latest figures on supply and demand. Al-Naimi says that the demand for Saudi crude was increasing and this was evidence that the world's economy was recovering from recession. But says Naimi, this is a moving target; it is a very active market. The world economy seems to be recovering. I hope it will recover fast and therefore it will impact demand. If demand rises of course supply has to match it... Demand for our oil is rising, and so we are - at least I am - convinced that economic growth is started and will continue.
Will economic sanctions work against Iran? Not if China undermines our best shot at success. The Financial Times reports that, Chinese state companies this month began supplying petrol to Iran and now provide up to one-third of its imports in a development that threatens to undermine US-led efforts to shut off the supply of fuel on which its economy depends. The sales come in spite of moves over the past year by international companies, including BP and Reliance of India, to stop selling petrol to Iran, and highlight the difficulties of implementing sanctions aimed at curbing Iran's nuclear ambitions.
Sell November crude at 7378 - stop 7500.
Sell November heating oil at 18800 - stop 18900.
Sell November RBOB 18500 - stop 18700.
Buy November natural gas at 415 - stop 390.
The Dan Flynn Corn & Ethanol Report
The December Corn stalled last night after the day session gains. The December Corn had a range of 327 1/4 to 321 with a last of 323 1/2 which is down 2 1/2 cents. The Storms breezing through the Mid-West and Southern Plains are going to leave a dry dome which should have Bulls heading
for the exit. I anticipate Longs to lighten up if not liquidate all together. The U.S. Dollar remains to be weak and is the only support for the Grains insight.
On the Energy Front were now focusing on the November Crude Oil contract which is trading 40 tics lower at 7136. Weekly Inventories due out at 9:30 C.S.T. Has the Energy Complex digested all the nmbers yet ? Bulls are exhausting themselves to drive higher prices. Is this the big break we have been calling for ?