This Fed Statement Should Be Important

by Greg Harmon

I have no idea what Bernanke might say. Maybe as a lame duck he takes of off the niceties and tells America he is out of ideas and we are screwed if Congress continues to do nothing. Probably not. Maybe he convinces the FOMC that they should continue QE at the current pace until he retires so he can go out on a long high note. There are many people that watch what the Fed does and says as a full time job. They have volumes to say about what the message might be and how to interpret it. I care only how the market interprets the message and have done a little digging. The chart below may seem a little crowded but you can embiggen it. The ETF’s of the 4 major averages, The Dow ($DIA), S&P 500 ($SPY), Russell 2000 ($IWM) and Nasdaq 100 ($QQQ) are stacked on top off each other. The vertical lines are placed at the

dates of the FOMC meetings over the last 3 years. As a technician I am interested how the statement may or may not impact these indexes. The red lines are when the FOMC meeting changes the course of the market. Not the major trend but the intermediate trend. You can see that it happens often. In fact it has not gone more that 3 meetings without an intermediate change, until this current streak of 4 meetings. with the markets running flat into the meeting it gets more exciting as the change, if it comes could be either way. How are you prepping for the the announcement?

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Marking Time Ahead of the Fed

by Marc to Market

The US dollar is trading quietly, largely within yesterday's ranges ahead of the much anticipated FOMC meeting. Even more broadly, the capital markets are relatively quiet. Asia-Pacific equities were mostly lower, except for Japan, Thailand and Australia. Of note, Chinese shares edged lower to new six month lows amid the rising money market rates and talk that officials may begin granting approvals for new initial public offerings. European shares are narrowly mixed and the Dow Jones Stoxx 600 is off marginally, but of note the financials are the weakest sector.

There are three parts to the Fed story today: the FOMC statement, the forecasts and Bernanke's press conference. The statement itself is likely to be the least important. The general assessment of the economy is unlikely to change significantly. The description of price pressures and the labor market may be tweaked to recognize the lower core inflation and continued modest improvement in labor market conditions.

The Fed's forecasts are important. They are part of the forward guidance and is the bar against which the actual economic data needs to be measured against for policy implications. Here the Fed is likely to revise down its growth forecasts and, probably, its inflation forecasts. The mid-point in the March forecasts for GDP was 2.6%. This is well above market expectations which are closer to 2% for this year. The Fed may also shave next year's forecast from the current 3.2%. The 2015 projection of 3.3% (mid-point)may not be changed and is actually closer to market forecasts. Note that the US economy has not grown by more than 3% for a full calendar year in 8 years.

In March , the Fed's inflation forecast (mid-point) was 1.6%. The latest reading puts the core PCE deflator at 1.1%. Many Fed officials have argued the decline in price pressures is temporary. It may be, but it does not mean that it will decline further first. The Bloomberg consensus for the core PCE deflator this year is 1.5%. The Fed's unemployment forecast was 7.4% (mid-point) in March. The actual rate was 7.6% in May. While it could be tweaked, there seems to be a growing sense that the participation rate, the key to the decline in the unemployment rate, is likely to stabilize rather than recover.

The third part of the Fed's story today will be Bernanke's press conference. In his prepared remarks, we expect the Chairman to help investors differentiate between tapering and tightening and to try to drive home the point that current conditions are not sufficient to slow down the long-term asset purchases ($85 bln a month). The data, while encouraging, is still not good enough. The adjustment in the capital markets in general and risk assets in particular,have eased the risk that QE is fueling bubbles. And the subdued price pressures give the Fed more leeway to allow its experiment to continue. The Fed exited QE1 and QE2 too early and needs to avoid making the same mistake for a third time.

There were two other developments to note. First, Japan reported a large, but smaller than expected trade deficit for May. On an unadjusted basis the trade deficit was JPY993.9 bln compared with a consensus forecast of JPY1.22 trillion. On a seasonally adjusted basis, the JPY821. bln deficit compares with JPY890 bln consensus forecast and a downwardly revised JPY702.8 bln in April.

Perhaps more importantly exports were stronger than expected. Contrary to claims by some Japanese and foreign observers, the fact of the matter is that Japan's exports as a percent of GDP are more in line with the US (mid-teens) than Germany, Switzerland, Finland, Sweden and China (40-50%). Japan's exports rose 10.1% from a year ago. The market had been expecting about a 6.5% increase after 3.8% in April. Imports rose 10%, not the 11% the consensus was expecting.

Second, the minutes from the Bank of England's MPC meeting earlier this month were released. At his last meeting, Governor King was again out-voted (6-3) against renewing gilt purchases. Carney takes over the reins beginning next month. It is possible that he too is out-voted at his first MPC meeting. The majority of the MPC seems content with its current stance in that the recent data points to a cyclical recovery, while there is still risk of higher inflation in the coming months.

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US 'too generous' on China soybean import forecast

by Agrimoney.com

US foreign staff stoked the growing doubts over Washington forecasts of a 10m-tonne jump in China's soybean imports, flagging a hit from bird flu, in a report which raised fresh concerns over official Beijing crop statistics.

US Department of Agriculture foreign staff in Beijing forecast that Chinese soybean imports would show a strong rebound in 2013-14, citing "escalating growth in soymeal use and edible oil consumption".

However, their estimates for imports, at a record 67.5m tonnes, fell 1.5m tonnes short of the official USDA forecast, which has been widely questioned by analysts as too generous given pressures on profitability for soybean processors.

In fact, analysts on average foresee Chinese soybean imports - which are closely watched by investors, given the country's status as the top buyer – reaching 63m tonnes in 2013-14, according to a Bloomberg survey.

Shanghai JC Intelligence, a respected local analysis group, estimated the figure at 60.5m tonnes, saying that the USDA has "grossly overestimated China's demand" for soybeans.

'Flock destruction'

Demand for soymeal, the feed derived from soybeans, from poultry plants has been curtailed by the knock-on effects of the bird flu epidemic on chicken meat consumption.

The outbreak "weakened demand as flock destruction and consumer distrust of poultry products cooled poultry feed demands", the USDA staff said.

"Poultry meat and egg consumption is down since late March with many poultry farms, in particular those selling live birds, and some parent stock farms forced to dispose of breeding eggs and chicks due to slow demand."

Chinese hog producers are suffering negative margins too, of some 180-250 yuan ($29-40) per animal in March and April, thanks to "stagnant consumption" which, given the dearth of improvement during early-May holidays, "may continue in the near term".

Running at a loss

The USDA staff flagged hopes for better times ahead for China's hog sector, that "industry insiders expect a slight rise in pork production/consumption in 2013, which should partially offset the reduction in soymeal use for poultry".

Nonetheless, for now, Chinese soybean crush margins remain negative, by roughly 20 yuan per tonne, if an improvement on April levels above 40 yuan per tonne, according to Morgan Stanley.

The arbitrage for importing US supplies, open for most of the October-to-May period, has closed for private buyers, which pay VAT, the bank's data show.

Data concerns

The USDA staff also raised fresh concerns over Chinese crop data, which are often seen as overestimating production, thanks to a subsidy system which rewards regional authorities by output.

Unexpectedly strong crop prices in China, most recently for wheat, are viewed as a sign that official data showing ample supplies may be too generous.

This time, concerns centred on rapeseed data, for which data from provincial agriculture offices showing rises in planted area of some 2%, spurring an estimate from China's CNGOIC crop bureau of a 14.1m-tonne crop, may be too generous.

'Over-inflated numbers'

"Some non-governmental sources question these optimistic numbers," the USDA bureau said.

"Although the 2013-14 rapeseed yield is reportedly above average due to good weather conditions in major productions regions, such as Hunan and Sichuan, some experts criticise the planted area increases in Hubei, Sichuan and Jiangsu as being over-inflated to capture additional government subsidies.

"One Hunan crusher argued that Hunan rapeseed planted area could be more than 40% lower than the official area."

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Stay Crafty When You Are Thirsty

by Greg Harmon

Seems that the whole country is giving up on the big watery tasting beers in favor of craft beers. How do I know? Look at the charts. The craft beer stocks like Boston Beer, $SAM, and Craft Brewers Alliance, $BREW, have been moving higher. The chart for $BREW below shows the price nearing resistance at 8.00 after breaking higher from a Diamond

continuation pattern. The target out of the Diamond takes it to about 8.40 and it has support from a bullish and rising Relative Strength Index (RSI) and a Moving Average Convergence Divergence indicator (MACD) that is turning up. The Chart of $SAM shows similar strength, at resistance ready for a break out with RSI bullish and rising and the MACD

moving higher. It also shows a Crab with a Potential Reversal Zone (PRZ) at 189.74.But if you look at Ambev, $ABV, for example, the chart looks horrible and apt to get worse. A downtrend with falling RSI and a MACD that may be leveling. Yes the world is finally wising up. Taste over quantity.

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U.S. stocks rally as yen drops, Treasuries fluctuate before Fed

By Paul Dobson and Inyoung Hwang

U.S. stocks climbed for a second day while the yen weakened as investors awaited clues from the Federal Reserve about its plans for monetary stimulus. U.K. and German government bonds dropped while European equities were little changed. The Swiss franc strengthened.

The Standard & Poor’s 500 Index added 0.8% to 1,652.09 as of 3:15 p.m. in New York. The Japanese currency depreciated 0.8% to 95.23 yen per dollar. Britain’s 10- year gilt yield jumped six basis points to 2.14% while the rate on similar-maturity German debt rose five basis points to 1.57% and U.S. Treasury yields were little changed at 2.17%. Nickel and copper retreated, while oil and natural gas advanced.

The Fed starts a two-day policy meeting today, about a month after Chairman Ben S. Bernanke said quantitative easing could be scaled back if the employment outlook showed sustainable improvement. U.S. housing starts rose and the cost of living increased less than forecast in May, reports showed today. European Central Bank President Mario Draghi said policy makers are considering further non-standard monetary-policy tools.

“Everybody’s just waiting to hear what the Fed has to say,” Tom Wirth, who helps manage $1.6 billion as senior investment officer for Chemung Canal Trust Co. in Elmira, New York, said by telephone. “If they say they’ll taper sooner rather than later, there’ll be fear in the market and we’ll see a decline for some time in stocks. We’ll need to see the results of tapering. If the economy continues to roll along and grow without as much Fed buying, that will spur us to the next leg up in the bull market.”

Economic Data

The S&P 500 index advanced 0.8% yesterday, when reports showed U.S. manufacturing and homebuilder confidence rose and a British official said Group of Eight leaders see downside risks to the global economy abating. The index has rallied 16% this year and is up 144% from its bear-market low in 2009 amid the Fed’s bond buying program and four straight years of earnings growth.

An S&P index of 11 homebuilders added 0.7%, rebounding from an earlier 1.6% decline. Commerce Department data showed builders broke ground on 914,000 U.S. homes at an annualized rate, up 6.8% while below the the median estimate of 950,000 from 82 economists surveyed by Bloomberg. Another report showed the consumer price index increased 0.1% in May, half the median forecast, after falling 0.4% in April.

Market Leaders

General Electric Co., American Express Co. and UnitedHealth Group Inc. climbed at least 1.9% to lead gains in the Dow Jones Industrial Average. Flir Systems Inc. climbed 6.2% after Raymond James & Associates Inc. lifted its rating to strong buy. Walter Energy Corp. advanced 17% as Morgan Stanley said the coal miner’s shares may triple. Hormel Foods Corp. dropped 4% as the company cut its 2013 profit forecast.

Treasury 10-year note yields were down less than one basis point at 2.18% after climbing five basis points yesterday. The dollar was stronger against 11 of 16 major peers, while losing 0.3% to $1.3405 per dollar.

President Barack Obama said Fed Chairman Bernanke has stayed in his post “longer than he wanted,” one of the clearest signals the central bank chief will leave when his current term expires next year.

‘Outstanding Job’

“Ben Bernanke’s done an outstanding job,” Obama said in an interview with Charlie Rose that aired yesterday, when asked about nominating him for another term subject to Senate approval. “He’s already stayed a lot longer than he wanted or he was supposed to.”

Investors cut bond holdings to a near two-year low this month and bought stocks as expectations the Fed may remove monetary stimulus bolstered growth forecasts, a Bank of America Corp. survey showed.

A net 50% of 190 global fund managers, who together oversee about $572 billion, said they now hold fewer bonds than are represented in asset-allocation benchmarks, while the proportion who are overweight on stocks rose to 48% from 41% as they bought U.S. and European shares. Emerging- market equity holdings slumped to the lowest level since December 2008.

“Investors’ sentiment has been surprisingly resilient in recent weeks despite the jump in volatility in financial markets,” New York-based Michael Hartnett, chief investment strategist at Bank of America’s Merrill Lynch unit, wrote in a note to investors today. “While our fund-flows data shows bond capitulation, the survey shows that there has been no capitulation in equities in the U.S. and Europe.”

European Movers

The Stoxx Europe 600 Index closed little changed, with trading volume about 19% below the average over the past 30 days.

Among stocks moving in Europe, Kabel Deutschland Holding AG rose 3.7% to a record as Liberty Global Plc made a preliminary takeover offer for Germany’s largest cable provider, pitting the John Malone-controlled company against Vodafone Group Plc. Danske Bank A/S slid 6.1% after the Financial Supervisory Authority said Denmark’s biggest lender had underestimated its risky assets.

About four stocks gained for every three that fell in the MSCI Emerging Markets Index, which lost 0.4%. Brazil’s Ibovespa added 0.7% after slumping 2.6% in the previous two sessions. The Hang Seng China Enterprises Index slipped 0.1% after official data showing Chinese home prices climbed in almost all cities in May stoked concern the increases will limit the scope for monetary stimulus.

‘Precautionary Arrangements’

Portugal’s 10-year bond yield dropped 14 basis points to 6.11% after European Union Economic and Monetary Affairs Commissioner Olli Rehn said the EU is looking at possible “precautionary arrangements” that might help the nation exit its aid program.

The yen retreated against all 16 major peers, sliding 1.1% to 127.66 per euro. Australia’s dollar fell 0.6% to 94.86 U.S. cents after the Reserve Bank indicated the currency may weaken further.

The Swiss franc advanced versus 15 of 16 major peers after the lower house of parliament voted against further deliberations of a law allowing banks to cooperate with the U.S., making it less likely the bill will pass.

The JPMorgan Global FX Volatility Index increased to 10.45% from 10.25% yesterday after climbing to a one- year high of 11.43% on June 13.

Nickel, Copper

Nickel, the worst performer this year among the six main industrial metals traded on the London Metal Exchange, retreated 1% to $14,150 a metric ton. The metal declined as much as 1.8% to trade at the lowest price since 2009. Copper for delivery in three months declined for a second day, falling 1.1% to a six-week low of $7,005 a ton.

Natural gas gained 0.5% to $3.894 a million British thermal units after jumping 3.8% yesterday, the biggest increase in seven weeks, on forecasts for hotter weather in late June that may spur demand from power plants. West Texas Intermediate crude added 0.8% to $98.50 a barrel.

Wheat advanced on concern that rain in parts of the U.S., the world’s largest exporter, will further delay harvesting that’s lagged behind last year’s pace. The contract for delivery in September increased 1% to $6.9475 a bushel on the Chicago Board of Trade. Soybeans for November delivery gained 0.3% to $12.8975 a bushel.

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Brazilian currency touches four-year low, prompting intervention

By Gabrielle Coppola and Josue Leonel

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Brazil’s real touched a four-year low, prompting the central bank to intervene for a second straight day as a report showed higher-than-forecast inflation.

The real depreciated 0.3% to 2.1777 per U.S. dollar at 4:17 p.m. in Sao Paulo after falling 0.7% to 2.1856, the weakest intraday level since May 2009. Swap rates on the contract due in January 2015 surged 29 basis points, or 0.29 percentage point, to 10.11%, a 14-month high.

The currency fluctuated after the central bank sold $4.5 billion in foreign-exchange swap contracts in two auctions today, the sixth day of interventions in three weeks. Wholesale, construction and consumer prices rose 0.74% in the 20 days starting May 21, the Getulio Vargas Foundation reported. The median forecast of 13 analysts surveyed by Bloomberg was for a 0.65% increase in the IGP-M index.

“If there’s more currency devaluation, there will be more inflation,” Jankiel Santos, the chief economist at Banco Espirito Santo de Investimento in Sao Paulo, said in a telephone interview. “On top of that, the IGP-M shows that wholesale prices are under pressure again.”

Brazil may use all available instruments to contain the real’s volatility including selling dollars in the spot market, central bank president Alexandre Tombini said in an interview with Valor Economico published yesterday. He is due to attend a hearing in the Senate today.

The real rallied on June 13 after the government removed a 1% tax charged on wagers against the dollar, the second step taken this month to loosen capital controls. A week earlier, it eliminated a tax on foreign investors who buy Brazilian bonds in the domestic market.

Rate Increase

The central bank raised its target lending rate by 50 basis points on May 29 to 8%, surprising 38 of 57 economists surveyed by Bloomberg, who had expected a second straight increase of 25 basis points. The benchmark was held at a record low 7.25% from October to March to support growth.

The annual pace of consumer price increases accelerated for nine straight months through March to 6.59%, exceeding the upper end of the monetary authority’s target range of 2.50% to 6.50%. The inflation rate eased to 6.49% in April and was 6.50% in May.

The currency has fallen more than 5% since Fed Chairman Ben S. Bernanke said on May 22 that the central bank may taper its stimulus program if the outlook for employment shows “sustainable improvement.” U.S. policy makers begin a two-day meeting today.

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